Old Mutual plc
Registered in England and Wales No. 3591559 and
as an external company in each of South Africa
(No. 1999/004855/10), Malawi (No. 5282),
Namibia (No. F/3591559) and Zimbabwe (No. E1/99)
Registered Office:
5th Floor
Millennium Bridge House
2 Lambeth Hill
London EC4V 4GG
www.oldmutual.com
ANNUAL REPORT
AND ACCOUNTS 2012
A year of delivery
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OLd MUTUAL
IS AN INTERNATIONAL LONG-TERM
SAVINGS, PROTECTION, BANkING
AND INVESTMENT GROUP
Introduction
Financials
1
2
Our strategy, vision and values
Chairman’s message to shareholders
What we do
4
6
8
10
12
Our business at a glance
Business model
key performance indicators
Responsible business
Our markets
Where we are going
18
22
24
26
Annual review
Group Executive Committee
Summary of our strategy past and future
Our strategy going forward – 2013-2015
How we have performed
30
44
54
58
63
65
Long-Term Savings
Banking
Short-Term Insurance
US Asset Management
Non-core business – Bermuda
Financial review
Our risks
74
Risk and capital management
How we govern our business
82
84
99
Board of Directors
Directors’ Report on Corporate
Governance and other matters
Remuneration Report
Group Financial statements
118
119
Statement of directors’ responsibilities
Independent auditor’s report
to the members of Old Mutual plc
Consolidated income statement
Consolidated statement of comprehensive income
Reconciliation of adjusted operating profit to profit after tax
Consolidated statement of financial position
Consolidated statement of cash flows
Consolidated statement of changes in equity
Notes to the consolidated financial statements
120
121
122
124
125
126
130
Financial statements of the Company
212
213
214
215
Company statement of financial position
Company statement of cash flows
Company statement of changes in equity
Notes to the Company financial statements
MCEV
222
224
244
225
226
227
228
Statement of directors’ responsibilities
Independent auditor’s report
Adjusted Group MCEV by line of business
Adjusted operating Group MCEV statement of earnings
Adjusted operating Group MCEV earnings per share
Group Market Consistent Embedded Value statement
of earnings
Notes to the MCEV basis supplementary information
Shareholder information
249
Shareholder information
Annual Report
www.oldmutual.com/reports2012
Corporate website
www.oldmutual.com
Reporting centre
www.oldmutual.com/reportingcentre
Forward-looking statements
This Report contains certain forward-looking statements with respect to
Old Mutual plc’s and its subsidiaries’ plans and expectations relating to
their financial condition, performance and results. By their nature,
forward-looking statements involve risk and uncertainty because they relate
to future events and circumstances that are beyond Old Mutual plc’s control,
including, among other things, UK domestic and general economic and
business conditions, market-related risks such as fluctuations in interest
rates and exchange rates, policies and actions of regulatory authorities,
the impact of competition, inflation, deflation, the timing and impact of
other uncertainties or of future acquisitions or combinations within relevant
industries, as well as the impact of tax and other legislation and regulations
in territories where Old Mutual plc or its subsidiaries operate.
As a result, Old Mutual plc’s or its subsidiaries’ actual future financial
condition, performance and results may differ materially from the
plans and expectations set forth in such forward-looking statements.
Old Mutual plc undertakes no obligation to update any forward-looking
statements contained in this Report or any other forward-looking
statements that it may make.
Acknowledgements
Designed and produced by MerchantCantos
www.merchantcantos.com
Printed by The Colourhouse
This report is printed on Amadeus 100 offset and Amadeus 75 Matt,
produced from 100% and 75% recycled de-inked post-consumer waste
respectively. They are ECF-assured meaning no chemical bleaching has
been used in their manufacture, and FSC®-assured so that the fibre is
sourced from renewable and responsibly managed forests with a traceable
chain of custody throughout the process.
This Report is printed by an FSC®, ISO 14001, and carbon neutral certified
printer using vegetable oil based inks. All processes in the production of
this Report are on one site.
What
we do
Where we
are going
How we
have
performed
Our risks
Financials
How we govern our business
Our strategy
To continue to build a
long-term savings, protection,
banking and investment
Group by leveraging the
strength of our people and
capabilities in South Africa
and around the world. We
will focus, drive and optimise
our businesses to enhance
value for shareholders
and customers
Our VIsION
To be our customers’ most
trusted partner – passionate
about helping them achieve
their lifetime financial goals
Our VaLUes
Integrity
Respect
Accountability
Pushing beyond boundaries
1
Chairman’s
MESSAGE TO SHAREHOLDERS
We have made
substantial progress
during 2012 in delivering
the targets that we
set for ourselves and
in refocusing the
Group’s operations
Patrick O’sullivan
Chairman
2
Overview of 2012
Looking back at the last twelve months, it is pleasing to report to
you that we delivered on our commitments, despite a background
of continuing market volatility. Over the last three years, your Board
has focused its efforts on restoring shareholder value. With the
accomplishment of the disposal of our Nordic business, external
and internal debt repayments and the special dividend paid to
shareholders in June 2012, we have achieved those goals while
delivering a total shareholder return for the year of 35% in sterling
and 48% in rand. I am also pleased to note that our total profit after
tax attributable to ordinary shareholders reached £1,173 million.
Further details of our progress against targets, our future strategic
direction and how risk and reward have been managed to ensure
alignment with shareholders’ and other stakeholders’ interests are
contained in the following sections of this Report.
Board
We were delighted to announce the recruitment of Danuta Gray
as an independent non-executive director from March 2013 and
I welcome her to the Board. We were sorry to have to say goodbye
at the end of February 2013 to Eva Castillo, who felt unable to
continue on the Board because of the pressure of her other executive
commitments. Russell Edey and Lars Otterbeck will be retiring from
the Board at the AGM in May 2013 and my colleagues and I would
like to express our sincere appreciation for the major contribution
that they have made during their respective periods on the Board.
Final Dividend
We have been pleased to be able to announce a significantly
increased recommended final dividend for the year of 5.25p per
share (or its equivalent in other applicable currencies), as well as
to update our policy for future dividend payments in a way that
we hope will lead to continuing progress in shareholder returns.
Further information about the final dividend for 2012 is contained
in the Shareholder Information section of this Report.
annual General meeting
Our AGM will be held in London on 9 May 2013 and will be webcast
as in prior years. As usual, there will be an opportunity for shareholders
to submit questions to be dealt with at the meeting. Our shareholder
circular relating to the AGM includes further details of these matters.
shareholder communications
Following my letter in November 2012, we have now moved to
electronic communications as the main channel for communicating
with our shareholders in most of the territories where our shares
are listed, and I am pleased that we will thereby be able to make
a contribution to reducing our impact on the environment as well as
reducing the Group’s central costs. We have also this year continued
to try to simplify and declutter our Report (for example by placing
some supporting detail on to our website) and to move towards
a more integrated style of reporting, in line with developing
best practice.
Other matters
It goes without saying that our success would not happen without the
hard work of the Group’s employees all over the world. On behalf
of the Board, I would like to pay tribute to them.
Future
At the start of 2013 the financial world seems to have turned the corner
and volatility is calming down. However, in our markets we have
learned that financial strength, strong cash flow and dividends are the
differentiators in an uncertain world. Following the completion of our
restructuring last year, management is focused on growth in our key
markets. We are strongly positioned to achieve our targets and it is
progress against these that will determine the next phase of our
Group’s development and strategy.
Old Mutual plcAnnual Report and Accounts 2012
What We do
In this section we describe
how our business works and the
environment in which we operate
W
h
a
t
w
e
d
o
What
we do
Where we
are going
How we
have
performed
Our risks
Financials
How we govern our business
Contents
Our business at a glance
Business model
Key performance indicators
Responsible business
Our markets
4
6
8
10
12
our business
at a glance
This table shows a
high-level summary
of the Group and our
principal business units
1 On a constant currency basis.
2 % of total operating business unit’s AOP after tax and
non-controlling interests (before finance and other central costs).
3 % of FUM in Group core operations.
Excluding operating results from affiliates held for
sale or disposed of and OMAM (UK), which was transferred
to Old Mutual Wealth.
4
4
Group
old Mutual is an international long-term
savings, protection, banking and
investment Group
For more information on the Group’s Financial Performance
see the Financial Review on pages 65-72.
Business units
Long-Term Savings
We provide innovative life assurance-
based solutions which address both
protection and retirement needs
For more information on our Long-Term Savings business unit
see pages 30-43.
Banking
We have a majority shareholding in
nedbank, one of south Africa’s leading
banks, which also has banking interests
in other countries in southern Africa
For more information on our Banking business unit see pages 44-53.
Short-Term Insurance
We provide short-term insurance
solutions in southern Africa through
Mutual & Federal
For more information on our Short-Term Insurance business unit
see pages 54-57.
US Asset Management
We aim to grow our customers’ savings
and wealth, whether through active and
direct asset management or the selection
of funds and managers for customers
to invest in
For more information on our US Asset Management business unit
see pages 58-62.
Old Mutual plcAnnual Report and Accounts 2012
2011: £1,515m
adjusted operating profit (aOP) 2012
£1,614m
Funds under management (FUM) 2012
£262.2bn 2011: £267.2bn
number employed* 2012
54,368
2011: 55,549
2011: £793m
adjusted operating profit (aOP) 2012
£800m
Funds under management (FUM) 2012
£121.8bn
number employed 2012
21,789
2011: £108.5bn
2011: 22,851
2011: £755m
adjusted operating profit (aOP) 2012
£828m
common equity tier 1 ratio (Basel II.5)
11.4%
number employed 2012
28,767
2011: 28,494
2011: 10.5%
2011: £89m
adjusted operating profit (aOP) 2012
£43m
gross Written Premiums
£746m
number employed 2012
2,371
2011: £761m
2011: 2,390
2011: £67m
adjusted operating profit (aOP) 2012
£91m
Funds under management (FUM) 2012
£128.4bn 2011: £148.8bn
number employed 2012
1,225
2011: 1,564
Primary locations
Operational highlights
LTS – southern Africa, Europe, Colombia,
Mexico, India and China
US Asset Management – US and UK
Banking – southern Africa
Short-Term Insurance – southern Africa
AOP per share up 9%1 to 17.5p
Full dividend for the year was 7.0p, up 23%
in cash terms
Financial Groups Directive (FGD) surplus
of £2.0 billion
The 2012 financial targets, set in 2010,
were successfully delivered
* Nordic employees excluded from both periods
Operational highlights
contribution to group
AOP was up 9%1, with strong growth
in profits in Emerging Markets
NCCF was stable at £3.2 billion, despite
challenging market conditions in the UK
and Europe
There was a continued shift from covered to
non-covered business, with non-covered sales
up 27%1 to £14,549 million and APE sales
down 2%1 to £1,133 million
AOP2
FUM3
58%
46.4%
Our brand
Operational highlights
contribution to group
Strong headline earnings growth of 21%1.
AOP was up 23%1
Non-interest revenues up 12%1 and net
interest income up 9%1
Credit loss ratio improved to 1.05% from
1.13% in 2011
Basel II.5 common equity Tier 1 ratio of
11.4%, up from 10.5% in 2011
AOP2
FUM3
32%
4.5%
Our brand
Operational highlights
contribution to group
Gross written premiums increased by 9%1,
with strong premium growth in iWyze
AOP was down 47%1, due to worse claims
experience and losses at iWyze
Mutual & Federal remains well capitalised,
with a 64% international solvency margin
AOP2
FUM3
3%
0.1%
Our brands
Operational highlights
contribution to group
AOP was up 10%1 to £95 million in USAM’s
continuing operations4
NCCF in continuing operations4 was
£0.9 billion
FUM in continuing operations increased
by 14%1; with continued strong
investment performance
AOP2
FUM3
7%
49.0%
Our brands
5
What we doFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business business
model
Our business model
is simple. We harness
the resources and skills
we have across the
Group into our long-term
savings, protection,
banking and investment
businesses to drive value
for shareholders and
other stakeholders
For more information on the Group’s Strategy see
Where We Are Going on pages 18-28.
Our customers
Creating trusted relationships with our customers is at the
heart of everything we do. We aim to help them achieve their
lifetime financial goals through our savings, protection and
investment products.
Customers buy our products either directly or through an
intermediary such as an independent financial adviser.
This generates inflows of cash. At the same time we make
payments to our customers, returning their money in line with
our promise. This generates outflows of cash. Our aim is that,
in any period, our net flow – inflows less outflows – should be
positive. This increases our overall funds under management.
What we do
Our skills and resources enable us to excel in two key areas:
Banking, savings, protection and
investment products
We provide our customers with appropriate and tax-efficient
investment products, and protection products offering life
assurance and disability benefits. Protection business is
particularly important to our emerging markets businesses:
for example, we provide products to help our customers
save for their own and their family’s funerals – which has
significant cultural importance in many of the countries we
serve. Our banking services include personal and corporate
lending, transactional banking and savings accounts.
Fund management
In our long-term savings, protection, banking and investment
business we look after and grow our customers’ money,
offering financial security against single or multiple events.
For example, we provide for them in retirement through
pensions and annuities and help them to save for their
children’s education. Customers’ funds and their value
can rise or fall with the underlying markets.
Value for our stakeholders
We earn fees on the funds we manage and on the
financial products we sell. This, combined with tight
expense management, generates profits and cash. Cash
generated is used both to invest in future growth and to
reward our shareholders.
We also deliver value in its wider sense. Our international
operations generate employment, investment and tax
revenues around the world. The relationships we form with
our customers, our employees, governments, regulators and
community groups are vital to the success of our business.
We are committed to operating in a responsible way, making
decisions that take account of the impact on those around us.
Long-term need for our products
Our markets are characterised by resilience and stability.
Despite volatility in the world economy or the equity and
currency markets, the basic need of consumers around the
world to save for critical life events and retirement does not
change – particularly against a backdrop of reduced
government and employer capacity to provide these services.
6
Old Mutual plcAnnual Report and Accounts 2012Our five strategic priorities1. Develop the customer proposition and experience2. Deliver high performance in all business units3. Share skills and experience across the Group4. Build a culture of excellence5. Simplify our structure to unlock value Customers
■ Retail
■ Institutional
Customer numbers
over 14 million
Sales
Payments
What we do
Banking
products
Protection
Saving
Investments
Funds under management
Profits & cash
Stakeholders
■ Shareholders
■ Employees
■ Governments
■ Bondholders
■ Communities
RoE:
Skills and
resources
People
Product development
Values
IT & administration
Capital allocation
Distribution
Risk management
& governance
13%
Knowledge and
experience
7
What we doFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessBusiness model
KEY PERFORMANCE
INDICATORS (KPIs)
Here we describe
the financial and
non-financial KPIs
that we use to monitor
the performance of
our business
For more information on how our KPIs are
reflected in management’s incentives, please see
the descriptions of the short-term and long-term
incentive arrangements described in the
Remuneration Report on pages 99-116.
Financial KPI
Return on Equity (RoE) %
Net Client Cash Flow (NCCF)/
Opening Funds under
Management %
Group Value Creation %
(Long-Term Savings only)
IFRS Adjusted Operating Profit
Margin (basis points)
Adjusted Operating Earnings
per Share (pence)
Non-financial KPI
Customer numbers
Community Investment
(£ millions)
1
IFRS – International Financial Reporting Standards.
2 Numbers are as reported and historical figures have not been restated.
3 The 2012 customer numbers include OMSA Corporate members. 2011
numbers have been restated accordingly.
4 These figures include a share of Nedbank Foundation’s community
investment, reflecting Old Mutual’s average % ownership of Nedbank.
The same approach is applied to Old Mutual’s joint ventures. The 2011
amount has been restated to exclude Nordic and to include donations
made by OMSA in 2011 that were not previously recorded.
8
Old Mutual plcAnnual Report and Accounts 2012 Definition
Relevance
A relative measure expressed as a
percentage, calculated by dividing IFRS1
Adjusted Operating Profit (AOP) (post-tax
and minority interests) by the average capital
tied up in the business, where capital is
defined as shareholders’ equity excluding
hybrid capital.
Return on Equity is an indicator of our
profitability and capital efficiency,
demonstrating how much profit has been
generated from the resources provided by
our shareholders.
This measure indicates the extent to which
client funds are either retained or lost during
the year. Inflows are driven by premiums,
deposits and investments, whereas outflows
are driven by claims, surrenders,
withdrawals, benefits and maturities.
NCCF/Opening Funds Under Management
(FUM) measures our success in attracting new
business and retaining existing customers,
and provides a good indication of investor
confidence in our ability to manage their
funds effectively.
Measurement
Return on Equity (RoE)2
2012
2011
2010
2009
2008
2007
NCCF/Opening Funds
under Management2
2012
2011
2010
2009
2008
2007
Calculated as the Market Consistent
Embedded Value (MCEV) value of new
business plus MCEV experience variances
divided by the opening MCEV balance,
expressed as a percentage.
Group Value Creation for the Long-Term
Savings covered business measures the
contribution to Return on Embedded Value
from management actions of writing
profitable new business, and managing
expense, persistency, risk and other
experience compared with that which
was assumed.
Group Value Creation (LTS only)2
2012
2011
2010
2009
2008
2007
W
h
a
t
w
e
d
o
(%)
13.0
14.6
14.2
9.1
11.3
13.2
(%)
1.9
-3.9
-2.5
-0.7
-0.4
9.9
(%)
2.6
5.2
3.9
1.3
2.6
4.0
Calculated as pre-tax adjusted operating
profit divided by the average funds under
management for the period, expressed in
basis points.
IFRS Adjusted Operating Profit Margin
measures the profit margin we have earned
on the funds we manage. An improved basis
point margin is an indicator of the success
a company is having in growing its profits
at a greater rate than its funds under
management base.
Calculated as post-tax adjusted operating
profit divided by the adjusted weighted
average number of shares (WANS) held by
our investors.
Adjusted Operating Earnings per Share (EPS)
is an indicator of our profitability that
measures how much we earn for each share
held. The trend in the movement of EPS
demonstrates our rate of growth.
IFRS Adjusted Operating
Profit Margin2
2012
2011
2010
2009
2008
2007
(basis points)
50.0
46.0
42.0
38.7
33.4
55.2
Adjusted Operating Earnings
per Share2
2012
2011
2010
2009
2008
2007
(pence)
17.5
15.7
14.3
11.6
14.9
16.9
Definition
Relevance
Measurement
Measured by the total number of customers
of the Long-Term Savings division.
Total value of Old Mutual’s Community
Investment. This includes corporate donations
made through our Foundations and other
community investment projects. It excludes
employee donations through workplace
fund raising.
The size of the customer base is an indication
of the scale of the business. Growth in the
number of customers indicates that we have
an attractive proposition for new customers
and are satisfying the needs of our
existing customers.
Customer numbers – LTS (millions)3
2012
2011
8.2
8.0
These donations indicate how much the
Old Mutual Group invests in its continued
support for the local communities it serves.
Community Investment (£ millions)4
2012
2011
13.4
14.2
9
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
responsible
business
The successful delivery
of our business strategy
– and realisation of our
corporate vision – are
underpinned by our
approach to how we
do business
We are committed to operating responsibly, making
decisions that take account of the impact on those around us.
This approach must be part of everything we do – from our
day-to-day operations, and dealing with our customers,
to the way we invest our funds, help develop our local
communities and pay our taxes.
The Group Chairman, Patrick O’Sullivan, has overall
responsibility for Old Mutual operating in a responsible
manner and it is the role of our Responsible Business
Committee to champion and challenge our Responsible
Business approach, helping embed it in all we do.
In 2012 we have continued to invest in the policies, processes
and training that enable us to manage our responsibilities
effectively. We also conducted an internal audit of the
quality of our Responsible Business data for the first time
as part of strengthening the accountability and transparency
of our data.
1
2
This includes a share of Nedbank’s community investment, reflecting Old
Mutual’s average percentage ownership of Nedbank. The same approach
is applied to all Old Mutual joint ventures.
Our total carbon dioxide emissions are calculated using the GHG Protocol
Corporate Standard methodology using the equity approach. These figures
are rounded to the nearest 1,000 tCO2e.
For more information on our Responsible Business activities and achievements
please see our 2012 Responsible Business Report or visit our website at
www.oldmutual.com/reports2012.
10
responsible investment
■ Became a signatory to the UN-backed Principles for
Responsible Investment (UN PRI) as an asset owner and
undertook a Group-wide review of our current Responsible
Investment practices using the UN PRI reporting framework
■ Committed to the development of Responsible Investment
guidelines for the incorporation of environmental, social and
governance criteria into investment decisions for implementation
in 2013
■ Continued our involvement in the implementation of the
Code for Responsible Investing in South Africa (CRISA),
through our participation in the CRISA Committee.
responsible to our customers
■ Introduced a new and improved process for obtaining customer
feedback and identifying opportunities to prioritise
improvement actions
■ Appointed Committees for Customer Affairs (CCA) in two of our
long-term savings businesses to ensure a high priority focus on
treating customers fairly and learning from customer feedback
■ Continued to provide financial education to our customers
through our education programmes.
responsible to our employees
■ Awarded two of South Africa’s top employer awards for our
commitment to employees in Old Mutual South Africa and
Mutual & Federal
■ Extended ACT NOW! across the Group to promote behaviours
that reflect Old Mutual Group values in practice
■ Achieved our target of having two female members on the plc
Board and on target to achieve 2015 target of at least three
female Board members.
Old Mutual plcAnnual Report and Accounts 2012Responsible Business overviewTo deliver against our responsibilities effectively we focus on five key areas. These are some highlights from 2012: G overnance
Com
m
u
n
iti
t
n
e
Invest m
Responsible
Business
C
u
s
t
o
m
e
r
s
Employ e e s
e
s
E
n
v
i
r
o
n
m
e
nt
responsible to our communities
■ Continued to provide support tailored to the needs of local
communities, focusing on financial education
■ Invested £13.4 million (0.8% of pre tax AOP) in communities
across the Group including giving through our five
Old Mutual Foundations and the Nedbank Foundation1
■ Developed a new set of Community Investment Principles to
sharpen the focus of our community investment decisions on
strategic relevance and long-term impact
■ Achieved B-BBEE (Broad-Based Black Economic Empowerment)
Level 2 rating for all of our South African businesses.
responsible environmental
management
■ Reduced overall CO2e emissions since 2010 by nearly 13%
Group-wide from 764,000 tCO2e in 2010 to 666,000 tCO2e
in 2012 (Scope 1 and 2 emissions)2
■ Listed in Carbon Disclosure Leadership Index for the fourth
year running, ranking 8th in the financial services sector
■ Signed the Carbon Price Communiqué – an international coalition
of business leaders urging governments to ensure successful
transition to a climate-resilient economy.
11
What we doFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessResponsible Business overviewTo deliver against our responsibilities effectively we focus on five key areas. These are some highlights from 2012:
OUR
MARKETS
A high-level overview
of the drivers in our key
markets – in Africa, the
UK and across the globe
APE sales split by region at
December 2012
Emerging Markets
UK
Europe
46%
25%
29%
All numbers exclude Finland.
Assets under management by region at
December 2012
Emerging Markets
UK
Europe
43%
30%
27%
Includes OMAM(UK) from Q2 2012
12
Demographics
Demographic trends in our largest markets support our
business. Populations are growing and, in most cases, also
living longer.
For example, in the UK average life expectancy was 72 years
in 19701, had risen to 80 years by 20101 and continues to rise.
In sub-Saharan Africa, average life expectancy increased
from 51 years in 20031 to 54 years in 20101. South Africa was
a rare exception to this pattern: average life expectancy was
52 years in 20101, slightly down from 53 years in 19701.
South Africa’s population grew 10% to 51 million between
2003 and 20111. Over the same period, the population in
sub-Saharan Africa increased 22% to 876 million1. The
proportion of the working age population also increased
over this period. In western Europe the number of retirees
continued to increase, with the over-65 population of the
European Union rising from 16.3% in 2003 to 17.6% in 20111.
At the same time, living standards and expectations have also
increased. In our more mature markets people will spend
longer in retirement and, as a result, will need a higher level
of pension savings to fund their desired standard of living
and healthcare costs. In emerging markets, growing
economic empowerment is driving demand for a broad
range of protection, savings and investment products.
Global macro-economics
Emerging economies are achieving higher GDP growth rates
than developed economies. GDP per capita in both South
Africa and sub-Saharan Africa more than doubled between
2003 and 20111, with annual GDP growth in sub-Saharan
Africa above 4% in seven out of the eight years1.
As emerging markets develop, average incomes rise and the
requirement for financial services evolves from simple funding
and transactional products to more sophisticated protection
and savings products. Our strategy is to shape our offering
to fit the wider macro-marketplace.
Lower interest rates and slower growth in the European and
US markets mean people will have to save more to meet their
target levels of retirement income. Our capabilities in long-
term savings products, particularly pensions, position us well
to help them.
Government and public sector support
Ageing populations and rising health expectations are reducing
the extent to which governments can afford to meet their
social commitments, specifically on pensions and healthcare.
Increasingly, individuals will need to fund their own provision.
Regulatory change
Financial services have faced increased regulatory intervention
over the past few years and we expect this to continue.
We have anticipated and prepared for many of the regulatory
changes ahead, including Solvency II in Europe and Solvency
Assessment and Management in South Africa, and the
changes in the UK arising from the Retail Distribution Review.
We believe that some of our competitors are finding these
developments more challenging.
1 Source: World Bank
Old Mutual plcAnnual Report and Accounts 2012 Old Mutual in Africa1
South Africa
51m population1
Customers
M&F market position
Kenya
42m population1
5.1 million
#2
Malawi
15m population1
Namibia
2m population1
Market position
Customers
Life: #9, AM: #1
97,000
Market position
Customers
Life: #1, AM: #1
83,000
Market position
Customers
M&F market position
Life: #1, AM: #1
259,000
#2
Swaziland
1m population1
Market position
Customers
M&F market position
Life: #2
23,000
#1
Botswana
2m population1
M&F market position
Zimbabwe
13m population1
#4
Market position
Customers
M&F market position
Life: #1, AM: #1
862,000
#3
1 Source: 2011 populations per World Bank data.
Source: All other data based on Old Mutual estimates.
Impact on Old Mutual
These themes all provide opportunities for Old Mutual. We are
well positioned in our markets, have the products that consumers
need, and have built effective distribution channels for them.
Our two most profit-generative markets are Africa and
Emerging Markets, and the affluent markets of our
Old Mutual Wealth business.
Our African operations
There are around 200 million households in sub-Saharan
Africa. This population is increasingly urbanised1, much like
Asia in the recent past.
McKinsey has forecast that by 2020 more than half of
African households will have discretionary income, rising
from 85 million households to almost 130 million in 2020.
This represents a considerable opportunity and we aim to
attract a proportion of that income into savings. Our work
on financial education and literacy in the region supports
this goal.
Our South African operations
The powerhouse of our African business is South Africa,
where we have a long heritage and strong and trusted
brands. Old Mutual South Africa is one of the largest
financial service providers in South Africa, with just over
5 million individual retail and corporate customers. It provides
individuals, businesses, corporates and institutions with
long-term savings, protection and investment solutions.
Mutual & Federal is our short-term insurer in South Africa,
providing a full range of products to commercial and
domestic customers. Old Mutual is also the majority
shareholder in Nedbank, one of South Africa’s four
largest banking groups by assets.
South Africa accounts for 74% of our IFRS adjusted operating
profit, before tax and after non-controlling interests and 21%
of funds under management.
The demographics of South Africa are very favourable for
future growth in financial services. Large numbers of people
are coming into the economic system and the consumer
markets are growing rapidly.
Life Insurance S-Curve
P
D
G
/
P
W
G
e
f
i
L
14
12
10
8
6
4
2
0
South Africa
India
Vietnam
Sri Lanka
Indonesia
Philippines
China
Malaysia
Thailand
Source: Swiss Re (2010); Bernstein analysis
GDP per capita ($)
Hong Kong
South Korea
United Kingdom
Japan
Singapore
United States
Australia
13
What we doFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
OUR
MARKETS continued
2010 Public Pension Spending as % of GDP (IMF)
14%
12%
10%
8%
6%
4%
2%
0%
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Nedbank operates across Africa through its own operations
within the Southern African Development Community and its
alliance with the Ecobank Group, which has a presence in
more African countries than any other bank. The Ecobank-
Nedbank alliance is the largest banking network in Africa,
with more than 1,500 branches in 35 countries. We have
created an opportunity for shareholders to participate in
the Africa growth story through it’s rights to acquire 20%
in Ecobank Transnational Incorporated (ETI).
Mutual & Federal’s operations in Africa are broadly aligned
to Old Mutual’s long-term savings operations. This allows both
Mutual & Federal and Old Mutual to leverage each other’s
distribution networks and creates cost and revenue synergies.
We see increasing scope for Mutual & Federal and Old Mutual
Emerging Markets to work together more closely. For example,
we are in the process of acquiring a property and casualty
business in Nigeria which will be run alongside the newly
acquired life licence.
Case Study
Managing your money
In South Africa, we ran more than 1,500 financial education workshops
in 2012, reaching over 57,000 people. Our flagship programme
‘On the Money’ helps people with limited financial resources to learn and
practice responsible financial behaviour in an accessible and practical
format. We have successfully shared our expertise across the Group,
expanding this programme into Colombia, Mexico, Kenya, Namibia,
Zimbabwe, Swaziland and Nigeria in 2012.
For more information on the Group’s Responsible
Business activities see pages 10-11.
Source: IMF; Bernstein analysis
Our South African long-term savings business has a strong
market share in both the retail affluent and mass foundation
cluster businesses. It also has a substantial corporate segment
and is the largest asset manager in South Africa.
South Africa has a well-established banking industry,
maintaining sound and traditional banking practices within
a well-managed and regulated environment. Nedbank
positions itself as a bank for all, providing relevant banking
services to the broader population. During the year Nedbank
Retail increased its client base by 12% and Business Banking
added 775 new transactional banking clients; all the other
clusters continued to deepen client relationships, especially
with the previously disadvantaged communities. Nedbank
increased its staffed outlets by 80 and added a further 476
ATMs during the year.
The country’s short-term market experienced a marked
softening in rates for personal lines of business and a
significant level of localised catastrophe losses. To reduce
the impact of rate softening on its underwriting margin at
this stage of the underwriting cycle, Mutual & Federal focused
on cost containment and managed growth in policy numbers,
particularly through its direct channel iWyze and underwriting
management agencies.
Our operations in the rest of Africa
Elsewhere in Africa, Old Mutual’s long-term savings
operations are based in countries with urban populations
that have higher per-capita GDP – albeit at levels well below
those of Europe, the US and developed Asian markets – but
as yet relatively low spend on insurance. We currently have
more than 1.3 million customers in these countries – and are
the market leader in many cases. We believe these markets
offer significant growth opportunities which we are well
placed to capture. Our largest business by profits and funds
under management is in Namibia, but we recently acquired a
life licence in Nigeria, which has a very large population, and
have long-established businesses in Zimbabwe and Kenya.
14
Old Mutual plcAnnual Report and Accounts 2012
UK and Europe the biggest markets, but emerging markets are attractive
Market attractiveness for cross-border providers
(bubble size represents relative market size in APE)
i
n
g
r
a
m
E
P
A
e
v
i
t
l
a
e
R
35%
30%
25%
20%
15%
10%
5%
0%
Middle East
Africa
LatAm
N Asia
Continental
Europe
SE Asia
UK
5.0%
0.0%
10.0%
15.0%
20.0%
25.0%
Forecast market growth (%pa)
Source: NMG Consulting global BQM programmes and analysis of cross-border provider financial statements.
Affluent markets of
Old Mutual Wealth International
Our International business serves clients in the UK, South Africa
and the rest of the world who want to invest internationally.
These are typically internationally mobile professionals and
others seeking investment security, portability or choice.
We are usefully differentiated from competitors by
the geographic diversification of our footprint and our
related client base. Accessing a wide range of international
markets, including emerging markets, allows us to take full
advantage of shifting economic dynamics around the world.
The international markets served by Old Mutual Wealth
International show good potential for further growth,
especially in emerging markets.
We operate through long-term relationships with financial
intermediaries. Our current business is focused on the
Far East, Middle East, Latin America, South Africa and Europe
(including the UK). We aim to increase our capabilities and
the strength of our offering in these markets. To this end, we
started to roll out our new-generation, e-enabled investment
platform, Wealth Interactive, and launched several new
products in key markets during 2012.
The Old Mutual Wealth International business model allows us
to generate strong revenue flows from the assets we manage.
This results in attractive profitability and returns on equity.
As demand for international investments grows, increasing
competition from both cross-border and onshore providers
is putting pressure on margins. Although operating in multiple
regulatory environments is more complex than single-market
onshore operations, we believe it will remain an attractive
part of our overall business proposition: enhancing it through
product innovation, technology enablement and expanded
distribution is a core part of our strategy.
UK
Our UK activity is largely unit-linked investment business
distributed through independent financial advisers (IFAs).
We recently expanded our protection and asset management
capabilities by combining the asset management activities
of Skandia Investment Group and Old Mutual Asset
Managers (UK).
Two decades ago the investment market for UK retail
customers was predominantly served by with-profits products
sold largely by IFAs. These products tended to be difficult for
customers to understand and charges were opaque. They
offered customers a limited form of guarantee but, in general,
sub-optimal investment performance. Unlike most of our UK
peers, we do not have a large with-profits book. Moving on
from with-profits, the market has evolved through unit-linked
products – offering more transparency and investment
choice – to multi-manager solutions offering a wider range
of investment options from a broader choice of providers.
But all these remain essentially product driven.
The past decade has seen the emergence of fund platforms
focused on supporting adviser business models. These have
brought better value for customers through features such as
aggregated reporting, removal of upfront fund manager
charges and free switching. The platform market has grown
strongly and continues to do so. There are currently over
25 platforms in the UK market, with the four largest accounting
for around three-quarters of total platform assets. We continue
to hold a strong market position as a leading platform
focused on profitable retail business. As at December 2012
our market share was 20%.1
The importance of IFAs in the UK market reflects the large
number of consumers who seek the help of financial planning
experts. Regulation such as the Retail Distribution Review (RDR)
has emphasised the need for advisers to focus on helping
customers to make the right choices for their personal
circumstances and financial goals. The RDR has also required
advisers to clearly define their business models and make
choices regarding the parameters of the advice that they
offer, be it whole-of-market or based on a narrower range
of products and/or providers. Our proposition is to support
the variety of different business models that will exist in the
future by offering IFAs and their clients appropriate tools and
client-focused investment solutions through our investment
platform. Launched at the end of 2012, our RDR-ready
proposition already meets requirements due at the end of
2013 – so while our competitors develop and implement their
compliance solutions, we can focus fully on providing
capital-light investment solutions that meet customer needs.
1 Source: Q4 2012 Fundscape Platform Report
15
What we doFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
OUR
MARKETS continued
More and more IFAs are using platforms
Forecast Growth in the(cid:17)UK Platform Market, AUM (£bn)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
0
50
100 150 200 250 300 350 400 450
Proportion of IFA business on-platform in future %
2015
2014
2013
2012
2011
2010
0
10
20
30
40
50
60
70
80
90
Source: Sanford Bernstein 2012
Source: Investment Trends Survey 2012
Customer demographics create opportunities for advisers and product providers
UK population projections growth forecast (millions)1 (2010 to 2018)
75+
60-74
45-59
30-44
15-29
0-14
2010
2012
2014
2016
2018
Source: 1 Navigant/Office for National Statistics, 2010 based projections
The past few years have also seen changes in other
distribution channels. The bank channel continues to hold a
significantly lower share of the retail investment market in the
UK than elsewhere in Europe. The strains of the global financial
crisis and changing regulation under the RDR have prompted
a number of banks to cut or close their financial adviser arms.
Meanwhile, non-advised (direct) channels are widely
predicted to grow but have not yet reached material scale.
We foresee consolidation in the future, assuming the
commoditisation of the business model experienced in similar
markets such as Australia and the US. Some smaller players
leave the market, with the remaining participants potentially
capturing a disproportionate share of market growth.
Our strong market share, long-standing relationships with the
IFA community and competitive proposition position us well
to take advantage of such industry trends as they unfold.
Growth
(60+): Looking to maximise income to help subsidise retirement:
solutions for inheritance planning & income drawdown
are critical
(45-59): Looking for products that maximise capital growth
to finance large outgoings eg children’s university fees
(15-44): Looking to make mortgage decisions and for pension
and investment solutions: large buyers of finance advice
17%
10%
9%
1%
-1%
1%
United States
We run a US-based asset management business through
nine boutique firms (affiliates). These offer a diverse range
of investment strategies and products to a wide range of
institutional investors around the globe. We have completed
the process of focusing our affiliates on institutional clients in
2012, with the disposal or transfer of affiliates during the year.
The effect of this has been to improve operating margin and
the continuing business reported positive net client cash flows
in the period.
Non-US clients currently account for 35% of funds under
management (FUM) (31 December 2011: 33%). International
equity, emerging markets, global equity and global fixed
income products account for 52% of FUM (31 December
2011: 50%).
2012 saw favourable market conditions return in H2,
contributing to positive market performance for the year
as a whole. Investors continued to favour fixed income,
emerging markets equity and alternatives products over
US equities in 2012.
16
Old Mutual plcAnnual Report and Accounts 2012
a
r
e
g
o
n
g
i
W
h
e
r
e
w
e
WHERE WE ARE GOING
In this section, we describe the next stage
of our strategic journey
What
we do
Where we
are going
How we
have
performed
Our risks
Financials
How we govern our business
Contents
Annual review
Group Executive Committee
Summary of our strategy
past and future
Our strategy going forward
2013 – 2015
18
22
24
26
ANNUAL
REVIEW
Having committed
ourselves to stretching
strategic and financial
targets, 2012 marked
a milestone in their
achievement
Julian Roberts
Group Chief Executive
Timeline of our strategy
Set out new
three-year
Group Strategy
Sold US Life
Profits up 18%...
Old Mutual delivered a strong performance in 2012, driven
primarily by excellent results from its businesses in emerging
markets. Despite challenging macro-economic conditions
throughout most of the year, we saw excellent operational
performance across most businesses within the Group and
good profit growth on a constant currency basis. The Group
remains in a strong financial position, with reduced debt
levels and a Financial Groups Directive (FGD) surplus of
£2.0 billion. We made substantial returns of capital to both
equity and debt holders during the year, and paid a Special
Dividend of around £1 billion in June 2012. The Board is
recommending a final dividend of 5.25p (or its equivalent
in other applicable currencies), up 31% in cash terms. The
reported results of the Group’s businesses were affected by
a significant depreciation of the rand against sterling, with
the average rand rate declining during the period by 12%.
...against a challenging backdrop...
In South Africa, the economy grew by 2.5%, Government
debt to gross domestic product (GDP) was around 40%, and
the JSE grew by 23%. The impact was strong credit growth
(which is now weakening) and asset growth, but a softening of
rates in the general insurance industry. The ratings agencies
became concerned about the South African economy, citing
unrest in the mining sector and the drop in commodity prices
that fed through into a depreciation of the rand. This year has
started with continued asset growth and a strengthening of
the rand.
In Europe, sentiment to the euro seemed to improve, but
growth remained low, with Germany moving into recession
and youth unemployment in parts of southern Europe
growing to over 50%. Conditions in the UK were also
challenging, with the economy remaining flat, although the
FTSE100 Index rose by 6%. Unemployment remained lower
than expected and consumers continued to save, but cut
back on spending. In the US, markets remained flat until Q4,
when there was a marked improvement in sentiment.
Paid Special
Dividend of
around £1 billion
to shareholders
Skandia businesses
merged to create
Old Mutual Wealth
USAM completed
repositioning of its
portfolio through the
management buy-out of
five of its affiliate firms
iWyze launched
in Mutual &
Federal
Closed Old Mutual
Wealth’s Swiss book
to new business
Sold Old Mutual
Wealth’s Finnish
business
Announced
new strategy
for Old Mutual
Wealth
Sold Nordic
for £2.1 billion
Acquired Oceanic’s
Nigerian life insurance
business from Ecobank
end 2012
end 2009
end 2010
end 2011
Bought out Mutual
& Federal minority
shareholders
Sold USAM’s
Lincluden
affiliate
Sold USAM’s
Dwight and
OMCap affiliates
Combined Retail
Europe with Old
Mutual Wealth
Sale of Zimbabwe from Group
to Old Mutual Emerging Markets
as part of exercise to transfer
businesses to align legal structure
with how they are managed
Closed Old Mutual
Wealth’s Austrian
and German books
to new business
Bought out Imperial Holdings’
share of Imperial Bank and
integrated it in full into Nedbank
Combination of OMAM(UK)
and SIG to create Old Mutual
Global Investors (OMGI)
18
Old Mutual plcAnnual Report and Accounts 2012
...following the transformation of Old Mutual…
In March 2010, Old Mutual set its strategic objectives to be
achieved by the end of 2012, which would fundamentally
change our Group and the way we conduct our business.
These objectives were: to create a simplified and streamlined
Group; to apply rigorous criteria for keeping businesses
within the Group; to strengthen our balance sheet; to improve
our returns and implement a strict approach to capital
allocation; to focus at all times on our customers; and to
deploy our human capital, expertise and technology
seamlessly across geographies and business units. At that
time, we also set financial targets for cost and debt reduction
and return on equity (RoE) commensurate with meeting our
strategic objectives.
Over the past three years, we have regularly reported our
progress against these objectives. We have met or exceeded
the financial targets and made substantial strides towards
achieving our strategic objectives: we will continue to run our
business with them in mind.
We have invested in enhancing our governance and
control systems and these are working well, and we have
implemented numerous initiatives to improve our service to
customers. We have transferred technology and intellectual
capital across the Group: for example, we rolled out the
South African retail mass model in Mexico in 2012, and we
will be introducing the same model to our newly acquired
Nigerian business in 2013.
Old Mutual is a significantly different business from that of
three years ago. It is much simpler, more streamlined and
significantly de-risked: we have sold or closed a number
of businesses, including selling our Nordic operations for
£2.1 billion and US Life for $350 million. The criteria for
keeping businesses within the Group are strict: they must
be able to meet our capital and risk targets; be capable of
achieving a long-term 15% RoE; add value to, or receive value
from, other parts of the Group; have scope to create future
sustainable growth; and create future value for shareholders.
These criteria will remain. We will continue to evaluate the
optimal structure for the Group and to consider all options
in creating value for our shareholders and customers.
In the period since the implementation of the three-year
strategy at the start of 2010 through to its completion at the
end of 2012, the London line of Old Mutual shares delivered
a Total Shareholder Return (TSR) of 77.3%, versus a 21.2%
TSR from the FTSE100 Index. For the Johannesburg line,
Old Mutual delivered a TSR of 102.1% over the three years,
versus a 54.6% return from the JSE-All Share Index.
…leading to a financially strong and cash
generative Group...
We have a strong balance sheet, with our indebtedness much
reduced. Our track record of delivering strong and consistent
underlying cash returns – in the last three years we have
generated £2.25 billion in free surplus from core continuing
operations – gives us the ability both to invest for growth
and to maintain a secure dividend. Our gearing ratio has
decreased from 20.1% in 2009 to 8.5% at the end of 2012.
...which is resilient and focused on growth...
Our focus is now on markets where we see sustained growth
underpinned by structural factors. These are markets where
our experience, expertise and offering give us competitive
advantage, ensuring that we can provide our customers
with the products they want and which will fulfil their
financial needs.
...with a broad offering in the fastest growing South
African demographic...
Through our Old Mutual, Nedbank and Mutual & Federal
brands, we have a strong presence across the South African
retail financial services sector. These businesses are working
ever more closely together. For example, they have cut
costs by aligning some of their key procurement activities,
and they are working together on a number of customer-
facing activities. We continue to seek opportunities for
further collaboration.
While parts of the South African financial services sector are
undoubtedly heavily penetrated, there is a significant section
of the population that is currently demonstrating strong
growth – the emerging black middle class. We expect this
trend to continue. This section of the population, served by
our Mass Foundation Cluster (MFC), represents a spectrum
of South African workers, ranging from those coming into the
formal economy for the first time, to public sector workers
such as teachers and nurses.
We believe we have a significant competitive advantage
in this section of the market through our footprint of more
than 3,700 tied advisers, our network of more than 200
Old Mutual Finance branches and our holistic product
offering. We offer traditional life and savings products
through Old Mutual, general insurance through iWyze,
banking through Nedbank Retail and loan and debt
consolidation through Old Mutual Finance. This approach
ensures that we are well placed to capture the best clients
and advise and help the more distressed clients to manage
their finances.
Old Mutual now has nearly two million MFC customers, having
added a further 200,000 in 2012. In addition, our iWyze direct
general insurance offering has achieved good growth since
launch, selling more than 50,000 policies. Nedbank Retail has
over the past few years extended its focus on entry-level and
youth markets in its drive to be a bank for all and, together
with the middle-market, this has resulted in Nedbank gaining
818,000 entry-level banking customers (those earning less than
R100,000 per year) in the past three years.
Growth in South African retail mass markets
2009
2012
3 year
CAGR%
Mass Foundation
Cluster
APE sales (Rm)
Customer numbers
AOP (Rm)
Nedbank Retail
Entry-level
banking clients1
Headline earnings (Rm)
iWyze
Number of policies
1,454
1.5m
1,236
2.2m
(27)
2,443
2.0m
1,621
3.0m
2,552
–
51k
19%
10%
9%
11%
n/a
n/a
1
Represents clients earning less than R100,000 per year.
We continue to see growth in our Retail Affluent business,
which remains the Group’s largest profit generator and has
recently launched a substantially enhanced wealth offering
and reorganised its distribution. Over time, we expect
some of our MFC customers to migrate to Retail Affluent.
Our Corporate business is focusing on improving its efficiency
and client offering.
19
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessWhere we are going ANNUAL
REVIEW continued
...and expansion plan for sub-Saharan Africa...
Old Mutual has a substantial presence in the southern area
of sub-Saharan Africa with more than 1.3 million customers
outside South Africa. Rest of Africa customer numbers were
up 13% on 2011, with most of the growth in Zimbabwe and
Kenya. Profits rose 39% to £43 million in 2012 and funds
under management (FUM) grew 19% to £2.9 billion. Our
target of achieving profits in Africa equivalent to 10% of
OMSA’s profits by 2012 has been achieved and we are
on track to increase this to 15% by 2015.
We are now looking to build our business across countries
in East and West Africa that demonstrate the right levels of
growth and have the right demographics. We have set aside
around R5 billion of capital to fund this expansion. This is split
between a strategic investment fund of R2 billion, and further
capital of R3 billion, intended to be deployed over three to
five years. The strategic investment fund will be used to
acquire minority stakes in businesses in African markets.
We will target minority stakes for a number of reasons: where
a majority stake is not immediately available; where we do
not have the capacity to take a majority stake; or for strategic
reasons such as securing a distribution deal. The further
R3 billion will fund growth through buying majority stakes
in businesses.
We will deploy this capital in line with our strict capital
allocation criteria. We believe that the prospects for growth
in Africa are underpinned by sustainable, structural factors:
a growing population, with more workers entering the formal
economy for the first time and who are keen to protect their
wealth and assets; strong domestic GDP growth in a number of
countries; growing political stability; and an underpenetrated
financial sector for the majority of the population.
In 2000, Africa’s GDP was $587 billion, in 2012 it is expected
to be just under $2 trillion, and it is forecast to exceed
$2.5 trillion in 2016. Fuelling this GDP growth is a growing
youthful population which is becoming increasingly
urbanised, has more discretionary income and is under-
serviced by the insurance industry – both life insurance and
general insurance. While the interest shown in Africa has
grown exponentially over the past few years as companies
seek investment opportunities that demonstrate real growth,
Old Mutual has the advantage of having operated in Africa
for 168 years. We understand the climate for business and
investment, as well as the specific needs and expectations
of consumers.
As in South Africa, as we expand in the rest of Africa we
increasingly see opportunities for Old Mutual, Nedbank and
Mutual & Federal to work together. For example, OMSA and
Mutual & Federal will collaborate in each country under one
head who will be responsible for driving growth across both
business lines. Additionally, we have established a Group
African Co-operation Forum which will identify and facilitate
opportunities for increased co-operation and incremental
synergy in South Africa and collaboration on the African
expansion strategy.
20
We recently acquired the life assurance business of Oceanic
Bank in Nigeria, following the acquisition of Oceanic by
Ecobank. This can be seen as the template for how we expect
to roll out our business model in new markets in Africa.
While initially it will focus on selling credit life and group life
assurance schemes, this will be supplemented by the roll-out
of the full retail mass market product suite in 2013, using the
expertise, knowledge, product and back office systems from
our South African MFC business. We are currently building
an asset management business in Nigeria to complement this
business. We are also in the process of acquiring Oceanic’s
Nigerian general insurance business from Ecobank which
will, once completed, operate under the Old Mutual brand.
In East Africa, the Old Mutual Kenya life assurance business is
growing and our asset manager is the market leader. Our life
business recently signed a deal with the National Jua Kali,
the co-operative for informal workers in Kenya, to provide
insurance services for workers who previously had no access
to insurance products. It is estimated that the informal sector
currently accounts for around 75% of the working population
and around 34% of the country’s GDP. We will initially sell
burial products, but will look to expand this product range in
time, with consumers able to pay for their insurance via mobile
phones. We want to build scale in the Kenyan life business and
are looking at options in other East African countries.
We are also exploring the possibility of entering markets in
the South Africa Development Community where we are not
currently present, but which meet the criteria we apply to
new markets.
Nedbank currently has a banking presence in five southern
African countries where it offers retail and wholesale
banking, and deposit-taking. The focus is on economically
profitable markets where Nedbank’s rest of Africa division
has a competitive advantage. Nedbank has a deep strategic
alliance with Ecobank, providing clients of both institutions
access to the largest banking network in Africa, with more
than 2,000 staffed outlets in 36 countries. Nedbank has
subscription rights arising from the three-year term loan
facility made to Ecobank Transnational Incorporated (ETI),
Ecobank’s holding company, which, together with a top-up
investment by way of the anti-dilutionary provisions of the
agreement, may result in Nedbank acquiring a 20% equity
stake in ETI, some time between November 2013 and
November 2014.
We believe that, as we grow in South Africa and wider Africa,
we have an obligation to help the communities where we
operate. A significant part of this will be through raising funds
to create the infrastructure that Africa and its people need.
We are already active in this field. Through our Infrastructure,
Development and Environmental Assets fund we have
partnered with the South African Government in a number of
infrastructure projects, including: renewable energy projects
using wind, solar and hydroelectric technology; toll roads;
and the Department of Trade and Industry and Department
of Education buildings. Following an approach by the Public
Investment Corporation of South Africa, we established the
Schools and Education Investment Impact Fund and have so
far allocated more than £35 million to educational projects.
Our Housing Impact Fund raised more than £650 million to
build up to 120,000 low-cost houses in South Africa, for South
Africans earning less than R1,500 a month. These projects will
make a real, visible difference to the lives of the communities
where we operate.
Old Mutual plcAnnual Report and Accounts 2012 ...and the improvement in US Asset Management
continues…
We continue to focus on driving growth, increasing margins
and improving investment performance in our US Asset
Management business and we are beginning to see real
progress. During the period, we completed our programme
of focusing on long-term, institutionally-driven, active asset
management by disposing of seven out of 17 affiliates. We
saw a significant improvement in net client cash flow (NCCF)
for 2012, with net flows from continuing operations of £0.9
billion compared with an outflow of £3.0 billion in 2011. This
was the first positive annual NCCF recorded by US Asset
Management since 2007.
We continue to explore a partial IPO of the US Asset
Management business and, as we have previously stated,
the timing of this will be determined by our progress against
our goals of growth, improved margins and investment
performance, as well as by the conditions of the
equity markets.
…all driven by our customers
We understand that our success is governed ultimately by
our ability to give our customers the products, outcomes and
service levels that they expect from us. We have spent the
past three years ensuring that the Group’s primary focus is on
our customers and that this ethos is embedded in our culture.
We have introduced new customer service metrics and
added cultural parameters as part of our management’s
remuneration targets. While the progress against these
metrics has been encouraging, we are clear that we must
continue to innovate, in both product offering and
customer service.
Outlook
Our businesses have performed very well in 2012. While the
economic environment remains uncertain, we now have a
significantly restructured and de-risked business which is
focused on the markets where we want to be and where
we see long-term, structural growth. We are clear on our
priorities and confident that we will continue to deliver
sustainable value for our customers and shareholders.
...combined with a modern, low-risk developed
markets offering...
We announced our three-year plan for Old Mutual Wealth
towards the end of 2012. The combination of our UK,
International and European businesses into one business,
supported by the asset management capability of the newly
merged Old Mutual Global Investors (OMGI), will allow
us to develop further our own investment products, which
in turn should enable us to capture a greater share of the
value chain.
We believe we can unlock value by focusing on our core
growth markets, namely the UK and the International
cross-border markets, while managing the Old Mutual
Wealth Europe business and UK heritage book for value.
The manage-for-value strategy involves operating a closed
book model for our retail portfolios in Switzerland, Austria
and Germany, and the pre-Retail Distribution Review (RDR)
pension products in the UK with an emphasis on persistency,
cost efficiency and capital management to maximise cash
generation. In Italy, France and Poland we will focus on
developing profitability in our operations. We will also seek
to grow our cross-border sales internationally through our
International business based in the Isle of Man. We will
continue to explore ways to reduce our cost base.
We are targeting IFRS AOP pre-tax profits of more than
£300 million p.a. by 2015 from the Old Mutual Wealth business.
We are aiming to do this while meeting the RoE criterion of
between 12% and 15%, by growing our asset management
and other product revenues, developing our distribution
reach and capability, and achieving operational efficiencies.
While we already operate one of the UK’s leading platforms,
with £22 billion of FUM, we believe that in the post-RDR
world more and more retail financial services business will
be conducted via platforms. It is forecast that the amount
of assets held on UK platforms will grow substantially from
the current level of £250 billion and that Independent
Financial Advisers (IFAs) will continue to write most of their
business via platforms. The UK population is growing, most
rapidly in the upper age groups who are looking to maximise
income to support their retirement; and those approaching
retirement looking for products that will maximise their capital
position at retirement. Our growth focus will be on innovation
and distribution. We will develop investment management
and risk solutions tailored to our customers’ needs. We will
also look to secure and grow distribution in our international
cross-border markets. IFAs will remain our core route to
market and we will continue to provide them with tools and
investment solutions that will allow them to serve their clients.
21
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessWhere we are going GROUP
EXECUTIVE COMMITTEE
5
6
7
8
The Group Executive Committee comprises the
Group Chief Executive, Julian Roberts, the Group
Finance Director, Philip Broadley, and six other
members of senior executive management of
the Group.
1 Julian Roberts (55) B.A., F.C.A., M.C.T.
Group Chief Executive since September 2008.
Also a member of the Nomination Committee and
a non‑executive director of Nedbank Group Limited,
Nedbank Limited and Old Mutual Life Assurance Company
(South Africa) Limited
Julian Roberts joined Old Mutual in 2000 as Group Finance
Director, moving on to become CEO of Skandia following its
purchase by Old Mutual in 2006. Before joining Old Mutual,
he was Group Finance Director of Sun Life & Provincial
Holdings plc and, before that, Chief Financial Officer
of Aon UK Holdings Limited.
2 Philip Broadley (52) M.A., F.C.A.
Group Finance Director since November 2008. Also a member
of the Board Risk Committee and a non‑executive director
of Old Mutual (US) Holdings Inc., the parent company of
US Asset Management
Philip Broadley was Group Finance Director of Prudential plc
from 2000 to 2008, having previously been a partner in
Arthur Andersen from 1993 to 2000. He has been Chairman
of the 100 Group of Finance Directors, was a founding
member and trustee of the CFO Forum of European Insurance
Company Finance Directors, and was a member of the
IASB’s Insurance Working Group. He is a member of the
Code Committee of the UK Takeover Panel and of the
Oxford University Audit and Scrutiny Committee.
3 Peter Bain (54) B.A., J.D.
President and Chief Executive Officer,
US Asset Management
Peter Bain is President and Chief Executive Officer of
US Asset Management, the US‑based international asset
management business of Old Mutual plc. He has more than
two decades of experience leading and advising firms in the
investment management industry. Previously he was a Senior
Executive Vice President at Legg Mason, Inc., where he
held leadership positions from 2000 to 2009. Most recently
he served as Head of Affiliate Management and
Corporate Strategy there, with responsibility for overseeing
the firm’s investment managers. Prior to that, he was Chief
Administrative Officer, responsible for the firm’s overall
administration and operations.
1
2
3
4
22
Old Mutual plcAnnual Report and Accounts 2012 7 Sue Kean (50) B.A. (Econ.) A.C.A.
Chief Risk Officer
Sue Kean has been Chief Risk Officer since January 2011,
having joined Old Mutual in July 2010 as Head of Governance
& Regulatory Compliance. She has over 25 years’ experience
in insurance and financial services. She previously worked at
Friends Provident and Aviva in a variety of risk and regulatory
roles. She also spent time at the Financial Services Authority, and
held positions in relation to Solvency II on industry bodies such
as the Chief Risk Officer Forum and the European insurance
trade body, the Comité Européen des Assurances (CEA).
8 Don Schneider (55) B.A., M.A.
Group Human Resources Director
Don Schneider has been Group HR Director since May 2009.
He was previously Senior Vice President and Head of Human
Resources for the Global Wealth Management Division of
Merrill Lynch. Prior to that, he headed HR for their Global
Markets and Investment Banking Division. He originally
joined Merrill Lynch in 1997 as Head of International Human
Resources, based in London, where he was responsible for
all HR activities outside the US. Prior to that, he worked for
Morgan Stanley for 13 years and held a variety of senior
HR roles in both New York and London.
4 Mike Brown (46) B.Com., Dip. Acc., C.A. (SA), A.M.P.
Chief Executive, Nedbank Group
Mike Brown has been Chief Executive of Nedbank Group
Limited since March 2010. He was previously the Chief
Financial Officer of Nedbank Group and Nedbank Limited
from November 2004. Prior to that, he headed Property
Finance at Nedbank and before that he was an executive
director of BoE Limited.
5 Ian Gladman (48) B.A.
Group Strategy Director
Ian Gladman has been Group Strategy Director since
January 2012. He had previously worked at UBS Investment
Bank for 16 years, most recently as Co‑Head of Financial
Institutions, EMEA, covering a wide range of UK and European
insurance companies, banks and asset managers. He was
previously Head of Corporate Finance, South Africa for
UBS from 1998 to 2001, during which time he led the local
UBS team advising Old Mutual on its demutualisation and
original listing. He also advised Nedbank on a number of
assignments and BoE on its acquisition by Nedbank. Prior to
joining UBS, he worked at Goldman Sachs and at JP Morgan.
6 Paul Hanratty (51) B.Bus. Sc. (Hons), F.I.A.
Chief Executive Officer, Long‑Term Savings and Chairman,
Old Mutual South Africa
Paul Hanratty has been CEO of Long‑Term Savings since
March 2009 and Chairman of Old Mutual South Africa
(OMSA) since September 2009. He has been with OMSA
since 1984. He is a fellow of the Institute of Actuaries and has
held a number of roles at Old Mutual, including Head of
Product Development, General Manager Finance and
Actuarial, and Head of the Retail business of OMSA.
He joined the Board of OMSA’s life business in 2003 and
became Managing Director of OMSA in 2006.
23
Where we are goingFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Summary of our Strategy
past and future
Our five strategic priorities
1. Develop the
customer proposition
and experience
2. Deliver high
performance in
all business units
3. Share skills and
experience across
the Group
4. Build a culture
of excellence
Progress since 2010
■ Improved customer insight and segmentation to better
serve customer needs
■ Rationalised, improved and expanded the product range
in our Emerging Markets businesses and improved the
customer experience
■ Expanded distribution capabilities in India, China, Latin
America, Kenya and Nigeria
■ Improved the platform functionality and product offerings
of the UK and International Wealth businesses
■ Improved Nedbank customer experience and security
through the use of proprietary digital technology
■ Achieved 3-year Group RoE and cost-saving targets
■ Continued strong growth in Nedbank pre-tax profits and
net new primary customers in the Retail business
■ Achieved substantial increase in pre-tax AOP in
OMSA, particularly strong growth in non-covered sales,
and attractive growth in life assurance sales and
funds under management
■ Achieved strong uplift in USAM margin and achieved
positive NCCF
■ Implemented Basel III and prepared ourselves well
for Solvency 2 implementation
■ Joint voice and data IT outsourcing between OMSA,
Mutual & Federal and Nedbank
■ Rolled out the South African mass market offering into
Mexico and commenced roll-out in Swaziland, and used
South African back-office to support product launches in
Colombia and Mexico
■ Grew iWYZE through collaboration between OMSA
and Mutual & Federal
■ Combined Old Mutual Asset Managers UK and Skandia
Investment Group to create Old Mutual Global Investors
■ Embedded a set of desired ACT NOW! leadership
behaviours and aligned the remuneration of the
senior leadership
■ Ran the annual culture survey across the Group for the
second year, applying year-on-year shifts to measure
progress and to inform next steps
■ Continued to develop current and next generation of
leaders and gender and race diversity of senior teams
■ Nedbank and OMSA achieved Level 2 BBBEE
transformation status for the third consecutive year
and Mutual & Federal for the first year
5. Simplify our structure
to unlock value
■ Simplified the Group through the sale of our US Life,
Nordic and Finnish businesses
■ Paid a Special Dividend of circa £1bn from Nordic
sale proceeds
■ Disposed of non-core US Asset Management affiliates
for increased focus on our high performers
■ Closed our sub-scale retail operations in Switzerland,
Germany and Austria to new business
■ Significantly reduced the risk within the Bermuda-based
business through an effective hedging programme
24
Old Mutual plcAnnual Report and Accounts 2012 2012 trend
Priorities for 2013 – 2015
LTS customer numbers
(millions)
capture growth in key segments
■ Continue to improve the customer proposition to
■ Align our delivery to fulfil on the four elements
10
8
6
4
2
0
8.01
8.2
8.2
■ Expand distribution in key markets and segments,
including through direct channels and joint ventures
2011
2012
of our customer promise: to be most accessible;
to provide best financial education and advice;
to offer solutions most certain to deliver on
customer promises; and to be most supportive
of the communities we serve
Adjusted Operating Profit
(AOP) Earnings Per Share
(EPS) and RoE performance2
P
20
15
10
5
0
14.3p
14.2%
15.7p
14.6%
17.5p
13.0%
2010
2011
2012
AOP EPS (pence)
RoE%
%
20
15
10
5
0
■ In South Africa, capture growth in the Mass
Foundation and Retail Affluent segments
■ Grow Nedbank by: growing Retail; increasing
non-interest revenue; optimising the balance
sheet mix; expanding into the rest of Africa
■ Grow existing businesses in Africa, expanding from
Kenyan hub into East Africa and in West Africa through
Oceanic acquisitions in Nigeria, as well as through
leveraging Ecobank’s pan-African banking footprint
■ Continue to selectively invest and grow in Latin
America and Asia
■ Build a modern, vertically integrated wealth and asset
management business in the UK and International
with a focus on cost reduction, expanding the product
proposition and increasing share of AUM
■ Build a successful asset management capability
to complement our Wealth offerings
■ Continue to improve USAM performance –
develop investment capabilities of core affiliates
and complement with centre-led distribution and
selective acquisitions
■ Continue to deliver cost savings across the Group
■ Increase collaboration among OMSA, Nedbank
■ Increase collaboration among asset management
and M&F, to drive growth both in South Africa and
the rest of Africa
businesses to boost our asset management
capability and offering
Cost savings (£m)
Run-rate achieved2
150
120
90
60
30
0
133
89
59
2010
2011
2012
Chart heading
Cultural entropy (%)
15
12
9
6
3
0
Positive trend
12.2
11.4
2011
2012
The weighted average of Cultural Entropy scores
across the Group businesses. This is a measure
from the Culture Survey: the lower the score,
the healthier the culture, scores below 19%
indicating a well-functioning organisation.
Financial Groups Directive
(FGD) surplus (£bn)
2.5
2
1.5
1
0.5
0
2.1
2.0
2.0
2010
2011
2012
■ Continue to embed ACT NOW! leadership
behaviours across the Group and to use the
annual Culture survey to track progress
■ Build a strong leadership capability and
succession, with emphasis on developing the
leadership pipeline for key growth markets
■ Implement improved performance management
processes across the Group to foster performance
excellence and employee development
■ Further simplification of the Group by disposing of
■ Continue to work towards a partial IPO of USAM,
non-core and sub-scale businesses, where
appropriate
and execute when conditions are favourable
■ Further de-risking of the Group – particularly
■ Execute the Manage-for-value strategy in
at Old Mutual Bermuda
Continental Europe
1 Restated to include Emerging Markets corporate customers.
2 Numbers restated for discontinued operations.
For more information on how delivering on our
strategy is reflected in management’s incentives,
please see the descriptions of the long-term incentive
arrangements described in the Remuneration
Report on pages 99-116.
25
Where we are goingFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business our Strategy
GOInG fOrWard – 2013-2015
In early 2010, in the depths
of the global financial crisis,
we set out a clear strategy for
returning our Group to a position
of strength that would enable
us to take advantage of the
attractive growth opportunities
available to us
Over the past three years, we have delivered on our strategy,
not only achieving all the financial targets we set ourselves,
but also reshaping, de-risking and refocusing the Group.
In the previous section on page 24 we have summarised
our progress since 2010, and below elaborate on key
achievements. In particular we have:
■ Achieved our 3-year RoE and cost-saving targets, while
delivering strong business unit performance improvements
and attractive growth, particularly in Nedbank, OMSA
and USAM
■ Simplified the Group by completing the sales of our
US Life, Nordic and Finnish businesses
■ Disposed of non-core US asset management affiliates
to better focus on our high-performing affiliates
■ Closed our sub-scale retail operations in Switzerland,
Germany and Austria to new business
■ Repaid over £1.5bn of debt and optimised the Group’s
balance sheet and capital structure, and generated
a strong FGD capital surplus
■ Prepared our insurance businesses for Solvency II
implementation, while Nedbank’s pro forma Basel III
common equity Tier 1 capital ratio is well above
regulatory requirements and within Nedbank’s
new Basel III target range
■ Reduced the risk within Old Mutual Bermuda by
facilitating the redemption of assets carrying the
Universal Guarantee Option and effectively managing
a hedging programme that succeeded in protecting
the Group*
■ Increased collaboration across the businesses to deliver
both cost and revenue synergies. For example, in South
Africa we partnered across OMSA, Mutual & Federal
and Nedbank to outsource a substantial portion of our
voice- and data-related IT requirements, while OMSA and
Mutual & Federal continued to collaborate to grow iWyze,
our direct general insurance offering. We rolled out
our South African mass market offering into Mexico,
commenced the roll-out into Swaziland and used our
South African back-office to support product launches
in Colombia and Mexico
■ In the UK, combined Old Mutual Asset Managers UK and
Skandia Investment Group to create Old Mutual Global
Investors to drive our UK asset management strategy
26
■ Made organisational changes to drive improved
performance; for example, we established a management
hub in Johannesburg from which to manage all life, savings
and protection businesses in Emerging Markets, and we
established the Group African Co-operation Forum,
to identify and facilitate opportunities for increased
co-operation and incremental synergy in South Africa,
and for increased collaboration to expand in the rest
of Africa
■ Improved our customer value propositions, particularly
with respect to product range and access, by rationalising,
improving and expanding our product range in our
Emerging Markets business, as well as expanding our
distribution capabilities in India, China, Latin America,
Kenya and Nigeria. Our UK and International Wealth
businesses improved their platform functionality and
product offering, and Nedbank improved customer
experience and security through the use of proprietary
digital technology
■ Sustained our efforts across the Group through leading
our people with a shared vision and enduring values, by
embedding a common Group-wide culture of desired
behaviours and by aligning remuneration and rewards
of the senior leadership group to drive delivery. In South
Africa, Nedbank and OMSA continued to be leaders in
empowerment and transformation, achieving Level 2
BBBEE status for the third consecutive year and Mutual
& Federal achieving the same level for the first time in 2012,
with Nedbank rated the most transformed out of the top 50
listed companies on the JSE
going forward
This consistent execution of our previous three-year strategy
has delivered a strong balance sheet, a solid capital base
and a much reduced risk profile, which puts us in a position
to access the attractive growth options presented by our
diverse portfolio of cash-generative and capital-light
businesses. We will aim to unlock further value within
our core businesses and to fund future organic growth
opportunities, whilst supporting an increased and sustainable
dividend for our shareholders.
Going forward we will focus our strategy in areas where we
believe we have strong market positions and well-developed
competencies and in those markets that present the most
promising growth prospects consistent with our desired risk
characteristics*. We will concentrate our efforts in the
following four key areas of value:
* For more information on risk and capital
management see pages 74-80.
Old Mutual plcAnnual Report and Accounts 2012 1. We will continue to build our
strong south african franchises
by sustaining and expanding
our leading market positions
2. We will expand our footprint
to access attractive economic
growth in the rest of africa and
other chosen emerging markets
Through our Mass Foundation Cluster business, we are the
leader in the mass market segment in South Africa, serving
a customer base of nearly two million customers, which
gives us over a 30% market share amongst our traditional
competitors, and around a 20% share of the mass foundation
market as a whole. Since 2009, we have gained half a million
net new customers in this growing segment (300,000 of these
since 2010) and anticipate continued strong customer growth
over the next three years. We are committed to meeting
the needs of this market and are actively improving and
expanding our product and distribution proposition to do so.
We are also expanding our service and product proposition
for the Retail Affluent segment to better serve the needs of the
growing number of South Africans who are migrating into
higher income bands. At the same time, we will seek to reduce
the costs of managing our heritage books and rationalise our
corporate business administration platforms and fund
options, where appropriate.
In Nedbank, we will continue to drive strong growth in South
Africa by focusing on three of our four key drivers: growing
non-interest revenue; growing the Retail business through
client-centred strategies and effective risk management; and
tilting the portfolio towards economic profit-enhancing
products and services.
Mutual & Federal has taken considerable steps to transform
its business, with significant improvements in customer service,
client proposition and technology. We expect it to benefit
in the future from improved pricing and underwriting
conditions, continued business transformation and, in the
medium term, growing contributions from niche capabilities
and from the iWyze direct offering.
In line with the shift from traditional life to new-style savings
products, we will continue to build our asset management
offering and capabilities in the region, with a particular focus
on improving the equity investment performance in OMIG(SA).
We remain firmly committed to supporting the South African
Government’s long-term National Development Plan, which
we believe not only supports social development in South
Africa, but is essential also for the long-term sustainability
of our business.
Old Mutual has long-standing and leading market positions
in a number of African countries outside South Africa, having
been present in some countries for over a hundred years.
We will continue to build on the growth achieved in 2012 in
these African businesses, with the aim that they will generate
the equivalent of 15% of Old Mutual South Africa’s pre-tax
AOP by the end of 2015. This will be achieved through
continued strong organic growth, working with our alliance
partners such as Ecobank and through selective and
appropriately sized acquisitions. In addition, we have
established an African Strategic Investment Fund to make
minority investments that will lead to distribution and
collaboration opportunities in new markets. In total,
Old Mutual Emerging Markets has set aside around R5 billion
for investment in the rest of Africa in the next three to five years.
Over the same period, as their fourth key growth driver,
Nedbank plans to increase its exposure to the rest of Africa
through organic growth, selective acquisitions in the Southern
African Development Community (SADC) and East Africa
regions, and in Central and West Africa through its intention
to exercise the option and top-up rights to acquire a 20%
stake in its alliance partner Ecobank between November
2013 and November 2014. Nedbank has a deep strategic
alliance with Ecobank, providing clients of both institutions
with access to the largest banking network in Africa, with
more than 2,000 staffed outlets in 36 countries.
To best leverage our collective strength, growth in Africa will
be pursued through the collaborative efforts of Nedbank,
Old Mutual Emerging Markets, Mutual & Federal and our
alliance partner Ecobank.
We will continue to explore our options for growth in other
promising emerging markets, including through our existing
operations in Latin America, where growth rates remain
highly attractive. In India and China, we will maintain our
presence through our joint ventures, which afford us low-risk
and cost-effective access to attractive growth markets.
27
Where we are goingFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Case study
Incorporating ESG issues
into investment and
ownership decisions
In 2012, Old Mutual became a signatory to the UN-backed Principles for
Responsible Investment (UN PRI) as an asset owner. These principles
provide a recognised framework for the incorporation of environmental,
social and governance (ESG) issues into investment and ownership
decision-making practices. We will be working with the UN PRI and others
to further strengthens our approach to ESG incorporation and to formalise
our responsible investment practices across the Group.
For more information on the Group’s Responsible Business
activities see pages 10-11.
5. across the Group
During 2013-2015, we will continue to evaluate opportunities
to simplify the Group to enhance shareholder value through
the disposal of sub-scale and/or non-core businesses
where appropriate.
We will continue to embed our responsible approach to
business everywhere in the Group, behaving ethically
and being a good citizen in the communities that we serve.
Across the Group, we will continue to put the customer at
the centre of everything we do, consistent with our vision
‘To become our customers’ most trusted partner – passionate
about helping them achieve their lifetime financial goals’.
We are confident that by putting our customers first and by
pursuing our four key growth opportunities of building our
strong South African franchise, expanding our footprint in the
rest of Africa and other selected emerging markets, growing
a successful Old Mutual Wealth business and improving
our Asset Management business in the US, we will create
significant value for shareholders, and at the same time
contribute towards the positive futures of all whom we
serve – our customers, our staff, our communities and
our shareholders.
3. We will grow our Old Mutual
Wealth business, targeting an
Ifrs pre-tax profit of £300 million
by 2015
Over the past year, we have brought together our wealth
management businesses under a single entity, with one
management team, one governance structure and a unified
strategy to create a modern, vertically integrated asset
management and investment solutions business.
We have recently outlined the key elements of the strategy
for our Old Mutual Wealth business around the key themes
of ‘Unify, Simplify and Grow’. The first two elements will
enable us to reduce our cost base and create scale
opportunities for growth. We will focus on our core markets
of the UK, cross-border international and selective European
countries, whilst managing for value our closed books in
Continental Europe, as well as in the UK.
We aim to generate incremental revenue and profits by
capturing more of the value chain around our Wealth
proposition, for example through expanding our range of
risk solutions and an increased asset management capability
to capture funds on the platform. We also plan to build our
distribution capabilities to achieve digital connectivity with
our customers and their advisers, as well as develop
offerings tailored to the growing area of restricted advice.
4. We will continue to improve
and grow our us asset
Management capability with
a view to a partial IpO of the
business, when conditions
are favourable
In 2012, we significantly improved the performance of the
US business, most notably improving AOP, NCCF and
operating margin through a number of initiatives, including
the divestment of non-core and underperforming affiliates.
We will continue to grow through our core affiliates, who
deliver institutionally-focused, active investment management
strategies across a diversified range of asset classes.
We will support our affiliates through centre-led global
distribution, which will drive incremental fund flows, by
providing seed funding capital and, where appropriate,
with complementary acquisitions.
Longer term we continue to believe that the future of the US
business is best served through an IPO. The timing will be
determined by progress against our goals of growth margins
and investment performance, as well as by conditions of
equity markets.
28
Old Mutual plcAnnual Report and Accounts 2012 How we Have performed
We set out in this section a review of our
financial performance during 2012 and
the outlook for our businesses
What
we do
Where we
are going
How we
have
performed
Our risks
Financials
p
e
r
f
o
r
m
e
d
H
o
w
w
e
h
a
v
e
How we govern our business
Contents
Long-Term Savings
Banking
Short-Term Insurance
US Asset Management
Non-core business – Bermuda
Financial review
30
44
54
58
63
65
29
Long-term
savings
The Long-Term Savings (LTS) division
offers life assurance, pensions and
investment products and operates in
southern Africa, Europe, Asia and
Latin America.
Through life assurance, pensions and investment products
LTS provides customers with:
Advice – financial planning and investment
Savings solutions – for shorter-term goals
Investments – for long-term goals
including retirement
Decumulation – post-retirement
Protection – life assurance and
personal lines.
We operate in two main business units, serving their
own distinct territories. Emerging Markets serves
South Africa, sub-Saharan Africa and new emerging
markets. Old Mutual Wealth offers saving and
investment solutions to affluent clients in Europe
and selected international markets.
Key financial highlights
adjusted operating profit (pre-tax)
£800m
2011: £793m
Funds under management
£121.8bn
2011: £108.5bn
number of employees
21,789
2011: 22,851
Long-term
savings
old mutual
Wealth
emerging
markets
30
Old Mutual plcAnnual Report and Accounts 2012 Operational oversight
Under the direction of Paul Hanratty and his Executive
Committee the LTS businesses have focused on the
tangible changes needed to achieve the Group’s vision of
becoming ‘our customers’ most trusted partner – passionate
about helping them achieve their lifetime financial goals’.
Delivering these changes required actions in four key areas:
■ Further development of our LTS business strategy based
on customers and core competencies
■ Defining and implementing elements that create a
customer-focused culture – such as the creation of
feedback surveys in core business territories, customer
experience principles, training, communications and
codifying customer-focused leadership behaviours
■ Customer services and administration
■ Strategic marketing and brand
■ Information technology
■ Product and proposition.
Customer services and administration
Rose Keanly now has responsibility for customer service and
administration for all the LTS businesses. Progress has been
made against the following objectives:
■ Improve customers’ service experience throughout their
relationships with LTS through shared training, insight
and IT improvements:
Progress to date includes aligning the activities of the
Customer Services and Operational departments with
those of other LTS departments, and contributing
significantly to the Group-wide focus on customer centricity.
Going forward we plan further representation at Group
leadership forums and deeper engagement in creating
compelling and workable customer and intermediary
value propositions throughout the business.
■ Drive down unit costs:
For 2012 the focus was on training the businesses in ‘LEAN’
process methodology and how to drive efficiencies by
identifying the essential and high-value elements of
processes. ‘LEAN’ experts are now established in all core
servicing territories and are monitoring and developing
our operational effectiveness and streamlining without
compromising the customer experience.
■ Reduce operational risks:
In 2012 we focused on the Treating Customers Fairly
regulatory initiative, introducing business unit Committees
for Customer Affairs to ensure that products and services
are consistently serving our clients’ best interests. We have
already introduced new feedback mechanisms to capture
the drivers of satisfaction and dissatisfaction so we can
prioritise improvements and refine operational procedures.
■ Enable faster entry into new markets, and launch of new
products into existing markets, by maximising re-use:
We have built the ‘business in a box’ concept, defining the
essentials that Old Mutual can take to a new territory while
integrating with the local culture. We have already begun
expansion into new African countries, integrating new
IT capabilities with our current suite to offer a more
bespoke offering.
■ Leverage our South African capability and other areas
of expertise more actively across the whole of LTS:
In 2012 we undertook work to evaluate the viability of a new
product based on a South African concept and tailored for
the UK market; plans are now underway to progress this
initiative. We are also planning to deploy South African
administration to support our Latin American operations.
strategic marketing and brand
Carlton Hood leads our centralised strategic marketing team.
The team is responsible for co-ordinating five initiatives
across LTS, which together made up the core of our customer
strategy in 2012:
■ Agreement and plan for implementation and roll-out of a
single Old Mutual brand, customer value propositions and
segmentation, customer and intermediary research, as well
as brand governance
■ Creating and developing a digital strategy, including
infrastructure and capability for our e-commerce
proposition across LTS, as well as the appointment of
digital strategy heads in core territories
■ Defining and creating an in-house Customer Relationship
Management (CRM) system, with the infrastructure and
capability to leverage our CRM capability across LTS.
We have already rolled it out to the wider southern
hemisphere business unit.
information technology
Led by Richard Boynett, the information technology team
developed ways to offer customers, intermediaries and
employees a more efficient and effective digital experience.
Services are now more responsive, cost-effective, and well
governed without sacrificing the speed-to-market and
innovation needed in our local markets. The team’s
priorities were:
■ Driving common infrastructure and resource sharing
across all LTS territories
■ Delivering an improved customer and
intermediary experience
■ Developing innovation and idea sharing between
core territories
■ Further leveraging South Africa as our IT hub, sharing
expertise and systems across LTS to enable rapid market
entry and development of online capabilities.
Over the medium term the team will focus on equipping local
business unit IT departments to integrate the central work
completed to date and carry it forward into ‘business as usual’.
Product and proposition
The product and proposition team made substantial
progress in:
■ Supporting the Old Mutual Wealth product expansion
and improvement announced in November 2012
■ Sharing customer and intermediary research and insight
such as Customer Value Propositions (which matches the
most appropriate product and service solutions for our
target customers), marketing and product collaboration,
business unit governance and global regulatory knowledge
■ Leading the product risk management function to ensure
rigorous pricing and asset liability management, improved
economic capital efficiency in product design, and better
leverage of our global balance sheet to local advantage.
For 2013, our businesses and streamlined central resources
will manage a period of significant change – particularly in
the European Old Mutual Wealth businesses, but also in
Old Mutual Emerging Markets as it executes its African
growth strategy and further improves operational efficiency
in South Africa.
31
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Long-term
savings continued
Long-term savings1
AOP (IFRS basis, pre-tax)
NCCF (£bn)
FUM (£bn)
Life assurance sales (APE)
PVNBP
Non-covered sales2,3
Value of new business
APE margin
PVNBP margin
Operating MCEV earnings (covered business, post-tax)
Adjusted MCEV (covered business)
Return on embedded value4
(VNB + experience variance)/MCEV (covered business)4
emerging markets
AOP (IFRS basis, pre-tax)
NCCF (£bn)
FUM (£bn)
Life assurance sales (APE)5
PVNBP5,6
Non-covered sales2
Value of new business5,6
APE margin6
PVNBP margin6
Operating MCEV earnings (covered business, post-tax)
Adjusted MCEV (covered business)6
Return on embedded value4,6,7
(VNB + experience variance)/MCEV (covered business)4,6,7
old mutual Wealth
AOP (IFRS basis, pre-tax)
NCCF (£bn)
FUM (£bn)
Life assurance sales (APE)
PVNBP
Non-covered sales2,3
Value of new business
APE margin
PVNBP margin
Operating MCEV earnings (covered business, post-tax)
Adjusted MCEV (covered business)
Return on embedded value4
(VNB + experience variance)/MCEV (covered business)4
2012
reported
800
3.2
121.8
1,133
8,665
14,549
197
18%
2.3%
336
5,740
5.9%
2.6%
2012
reported
605
1.2
52.6
523
3,331
8,937
135
27%
4.1%
328
3,296
10.7%
3.5%
2012
reported
195
2.0
69.2
610
5,334
5,612
62
10%
1.2%
8
2,444
0.3%
1.7%
2011
Constant
currency
733
3.2
104.1
1,152
8,767
11,450
167
2011
Constant
currency
510
0.4
45.5
469
2,949
6,761
89
2011
Constant
currency
223
2.8
58.6
683
5,818
4,689
78
£m
2011
% change
Reported
% change
9%
–
17%
(2)%
(1)%
27%
18%
793
3.2
108.5
1,207
9,113
12,248
177
15%
1.9%
552
5,713
9.3%
5.1%
2011
1%
–
12%
(6)%
(5)%
19%
11%
(39)%
–
£m
% change
Reported
% change
19%
200%
16%
12%
13%
32%
52%
570
0.4
49.9
524
3,295
7,559
99
20%
3.0%
349
3,167
11.9%
6.8%
2011
6%
200%
5%
–
1%
18%
36%
(6)%
4%
£m
% change
Reported
% change
(13)%
(29)%
18%
(11)%
(8)%
20%
(21)%
223
2.8
58.6
683
5,818
4,689
78
11%
1.3%
203
2,546
7.8%
4.0%
(13)%
(29)%
18%
(11)%
(8)%
20%
(21)%
(96)%
–
1 The comparative period has been restated to reflect Nordic as discontinued.
2
3 OMAM(UK) was transferred to Old Mutual Wealth from USAM at the beginning of Q2 2012. £270 million of OMAM(UK) non-covered sales from Q1 2012 and £1,096 million
Includes unit trust, mutual fund and other sales.
from 2011 are therefore excluded from non-covered sales.
4 RoEV and (VNB + experience variance)/MCEV (covered business) were calculated in local currency, except for LTS where they were calculated on a reporting currency basis.
5 Premiums in respect of MFC Credit Life sales have been included in APE sales, PVNBP and VNB for the first time in 2012.
6 PVNBP, value of new business APE margin and PVNBP margin for Emerging Markets represent South Africa and Namibia only, they exclude Zimbabwe, Kenya, Malawi
and Swaziland.
7 The return on embedded value and (VNB + experience variance)/MCEV metrics for the comparative period have not been restated to include Zimbabwe, Kenya, Malawi and
Swaziland in the opening MCEV.
32
Old Mutual plcAnnual Report and Accounts 2012 On a reported basis the Emerging Markets business accounts
for 76% of LTS IFRS AOP earnings, 43% of LTS FUM and 45%
of LTS APE sales.
The following analysis is presented on a constant currency basis.
Net client cash flow and gross inflows
Overall LTS NCCF was flat at £3.2 billion, with increased
NCCF in Emerging Markets offset by reduced inflows to
Old Mutual Wealth.
Gross inflows for Emerging Markets grew 25% to £11.7
billion, with our sales mix continuing to highlight the growing
shift in South Africa from traditional life products to modern
investment products including unit trusts and mutual funds.
Emerging Markets NCCF improved by £0.8 billion to £1.2
billion, driven mainly by large deals secured by the OMIG(SA)
boutiques and the Latin American businesses, strong sales in
Old Mutual Unit Trusts (OMUT) and Rest of Africa, and
improved single premium sales in Corporate. An expected
outflow of £1.0 billion low-margin equity assets from the
South African Public Investment Corporation (PIC) took place
in July 2012 (2011: £0.2 billion outflow from PIC). Only a small
amount of assets managed for the PIC in traditional asset
classes remain. Excluding the PIC outflows, NCCF improved
by £1.6 billion versus 2011 and OMIG(SA) would have
reflected positive NCCF of £0.3 billion in 2012.
Gross inflows in Old Mutual Wealth were £11.6 billion
(2011: £11.0 billion), led by UK Platform and Old Mutual
Global Investment (OMGI) inflows. OMAM(UK) was
transferred to Old Mutual Wealth at the beginning of
Q2 2012. Including the gross sales of OMAM(UK) for
the whole of 2012 and 2011, gross sales were down 2%
to £11.9 billion (2011: £12.1 billion).
Old Mutual Wealth NCCF decreased to £2.0 billion from
£2.8 billion in 2011, given lower sales volumes, the closure of
the Austrian, German and Swiss books to new business and
modest change in redemptions and transfers from the UK
Platform in the run-up to RDR. We continued to see strong
inflows reflecting the momentum in our proposition as we
attract new customers and further enhance features and
functionality. This is particularly encouraging as it comes
despite a backdrop of challenging markets, where advisers
have remained focused on ensuring readiness for the RDR.
UK Platform NCCF was £2.2 billion (2011: £3.3 billion).
Net outflows from the UK Heritage business reduced by 23%.
Funds under management
Overall LTS FUM rose 17% to £121.8 billion, due to higher
equity markets and strong net client cash inflows. Emerging
Markets FUM increased by 16% to £52.6 billion. Old Mutual
Wealth FUM increased by 18% to £69.2 billion. The sale of the
Finnish business reduced FUM by £1.1 billion.
UK Platform FUM increased to £22.6 billion (2011:
£18.8 billion), further cementing Old Mutual Wealth’s position
as one of the largest participants in this retail market.
OMGI delivered solid investment performance, with 80% of
OMGI funds above median over three years (AUM weighted)
and 33% of funds in the top decile. Six of its 40 investment
professionals were named in the CityWire Global Top 1000
Fund Managers for 2012.
IFRS AOP results
Overall LTS AOP increased 9% to £800 million.
Emerging Markets AOP (pre-tax) increased by 19% to £605
million, with strong growth in profits in South Africa and Rest
of Africa.
■ Strong profits in the South African retail businesses were
due to good investment returns on policyholder funds and
positive mortality and disability experience. Successful
maintenance expense management has resulted in positive
assumption changes. There was reduced new business
strain, given improved product mix and pricing and a
release of some contingency reserves in respect of a
legacy structured product. The 130 bps reduction in the
benchmark 10 year government bond yield increased the
value placed on certain policyholder liabilities. The impact
in H2 2012 was less than the impact in H1 2012, as a result
of management actions, including the implementation of
some partial hedging. The pre-tax net effect for 2012 was
a charge of R374 million. Persistency for 2012 was in line
with the revised assumptions set in December 2011
■ Corporate business profits in South Africa returned to
normalised levels after the strengthening of the Investment
Guarantee Reserve in 2011
■ Rest of Africa profits improved mainly within Namibia and
Zimbabwe due to favourable experience variances,
assumption changes and foreign exchange gains
■ OMIG(SA) profits increased, with improved management
and performance fees, notwithstanding the exceptional
private equity gain in 2011
■ This was partly offset by increased central and
administration expenses, due to higher share-based
payment and incentive provisions, increased investment
in technology and new business development.
Old Mutual Wealth AOP was £195 million after a net £15
million restructuring charge during the year. The prior year’s
AOP of £223 million included £32 million of policyholder tax
smoothing. OMAM(UK) AOP was £2 million in 2011 meaning
that the pro-forma comparable total Old Mutual Wealth
AOP was £225 million, including policyholder tax smoothing.
The UK Platform generated a profit in 2012. In Q3 2012 we
completed the sale of the Finnish business, which generated
£12 million of post-tax profits in 2012 and £12 million for the
whole of 2011.
Operating conditions have been difficult: world equity markets
have remained volatile and economic conditions in Europe
have continued to be challenging, with much uncertainty over
the euro during the year. This uncertainty continues to play a
role in investor decisions, dampening demand for risk-based
investments and driving a continued preference for more
defensive asset allocations. Sales margins improved in H2
2012 as clients started to return to equities.
The unification of SIG and OMAM(UK) has given us
improved operational scale and renewed commercial
focus. At the year-end the combined business reported an
operating margin of 14% excluding transition costs (or 5%
including these costs). The post-merger operating margin
on a run-rate basis was 18%, excluding transition costs.
33
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Long-term
savings continued
Life sales summary
Overall LTS APE sales decreased by 2% to £1,133 million.
In Emerging Markets, life APE sales increased by 12% to £523
million, with continued momentum in MFC and a good
performance in Corporate.
South African regular premium sales increased by 15%, with
MFC sales up by 21% as a result of a larger sales force, which
grew by 12%, and the inclusion of Old Mutual Finance Credit
Life sales of £14 million for the first time boosting risk sales.
MFC now serves just under two million customers, with an
additional 200,000 signed up in 2012 and we placed an
MFC agent in each of the Old Mutual Finance branches.
South African single premium sales increased by 3%:
Corporate sales growth of 30%, due mainly to large annuity
deals, was partially offset by lower Retail Affluent revenue
due to reduced fixed bond, living annuity and guaranteed
annuity sales. Had we converted Retail Affluent non-life
sales to an APE basis, total Retail Affluent sales would have
increased by 11%.
Sales in Asia improved by 24% leading to market share gains,
following increased single premium sales through the bank
channel in our Chinese joint venture, Old Mutual-Guodian,
and strong support from the Kotak Bank channel in India.
Sales in Asia will be reclassified as life sales from Q1 2013.
Old Mutual Wealth non-covered sales increased by 20% to
£5,612 million, primarily due to the inclusion of the non-
covered sales from OMAM(UK) for the first time in 2012.
Including OMAM(UK) sales in both 2011 and 2012, non-
covered sales increased by 2% to £5,882 million. OMGI sales
increased by 37% to £3,040 million as a number of funds
attracted increased inflows – notably the Spectrum fund
range. Spectrum now has £1.6 billion of FUM. OMGI
European retail sales were also strong, with gross inflows
of around £670 million. UK Heritage sales into Institutional
products increased during the year, benefiting from new
partnerships established in 2012. On the UK Platform,
non-covered sales fell 26% to £2,067 million as investor
confidence was weakened by volatile markets and IFAs
focused on preparation for RDR.
In the Rest of Africa, total APE sales increased by 15% –
due mainly to strong underlying growth in Zimbabwe and
Malawi, with the latter benefiting from the introduction of
mandatory occupational pension schemes.
Margins and value of new business
Across LTS as a whole, new business APE margin increased
to 18% from 15% and present value of new business
premiums (PVNBP) margin improved to 2.3% (2011: 1.9%).
Old Mutual Wealth single premium sales on the UK Platform
were down 4%, although inflows improved in Q4. Platform
sales accounted for £229 million of the total £279 million total
UK life sales on an APE basis.
APE sales on the UK Heritage book reduced by £19 million
to £50 million, reflecting the managed reduction in product
range in the lead-up to RDR.
In the cross-border International market, APE sales decreased
by 13% to £181 million, impacted by difficult market
conditions in H1 as well as regulatory changes. Sales picked
up in H2 as markets improved, with Q4 seeing the year’s
strongest quarterly sales and an improvement of 24% on the
same period in 2011.
Covered APE sales in Old Mutual Wealth Europe increased
by 12% to £124 million in the open book. Sales in Italy were
up 32% as a result of new distribution arrangements and
ongoing improvements in sales volumes from key strategic
partners. Modest sales levels in France and Poland reflected
the still challenging sales environment across Europe.
In Old Mutual Wealth’s European heritage markets, reduced
APE sales followed the closure of the German, Austrian and
Swiss books, as we reposition our business in these markets
to manage them for value.
Non-covered sales including unit trust,
mutual fund and other non-covered sales
Overall LTS non-covered sales were up 27% to
£14,549 million.
In Emerging Markets, non-covered sales increased by 32% to
£8,937 million. Unit trust and mutual fund sales increased by
42% with higher OMUT, acsis and Galaxy sales on the back
of high equity market growth in South Africa. The Colombian
Unit Trust business achieved strong sales in money market
and cross-border products. Other non-life sales grew by 22%
– boosted by significant, albeit lower-margin, inflows into
OMIGSA’s Dibanisa and Liability-Driven Investment boutiques.
In Emerging Markets, VNB improved strongly by 52% to
£135 million, with a significant increase in the APE margin
from 20% to 27%. VNB was boosted by improved product
mix in Corporate, due to a greater proportion of higher-
margin with-profit annuity sales, improved risk product
sales including the recording of Old Mutual Finance Credit
Life sales in MFC for the first time, improved mix of
business in Retail Affluent and a favourable change in
economic assumptions.
The value of new business in Old Mutual Wealth reduced
by £16 million to £62 million. H1 2012 was challenging,
with reduced sales volumes; but VNB strengthened in H2,
boosted by improved sales performance and a more
profitable product mix, particularly in the International
business, coupled with lower acquisition expenses.
In Old Mutual Wealth, lower sales and a less profitable
business mix in H1 reduced the APE margin to 10% (2011: 11%)
and PVNBP margin to 1.2%. (2011: 1.3%).
Operating MCEV earnings
Overall LTS operating MCEV earnings decreased by 39%
to £336 million, with Old Mutual Wealth impacted by
restructuring costs following strategic changes announced
in November 2012.
In Emerging Markets, operating MCEV earnings (post-tax)
increased by 5% to £328 million, but was down 6% on
a reported basis. The main contributors to this were the
improved VNB and positive operating assumption changes
and positive experience for mortality and disability. This was
partially offset by lower persistency experience variances,
following the final releases of short-term termination
provisions and closer alignment of persistency experience to
assumptions at the end of 2011, increased development costs
and tax experience losses. Total MCEV earnings (post-tax)
increased by 38% to £583 million – benefiting from positive
investment variances in 2012’s strong equity and bond
markets, and economic assumption changes resulting from
lower swap yields. There were some offsetting negative
impacts from changes to capital gains tax and the
introduction of dividend withholding tax.
34
Old Mutual plcAnnual Report and Accounts 2012 Old Mutual Wealth reported an operating MCEV earnings
(post-tax) of £8 million (2011: £203 million), reflecting
£89 million of restructuring costs, following strategic changes
in the UK business and the implementation of the ‘manage for
value’ strategy in the European businesses. Future cost saving
benefits expected to emerge from restructuring initiatives are
not yet reflected in MCEV, consistent with the Finance Forum
principles that govern MCEV methodology. Negative
experience variances, relating to development cost overruns,
and lower rebate profits, following positive assumption
changes in the UK and International businesses at the end
of 2011, reduced MCEV operating profit further. Total MCEV
earnings were £127 million (2011: £160 million), mainly due
to positive investment returns driven by growth in the UK
equity market.
Value creation
One of our key performance metrics for LTS covered business
is Group Value Creation. This measures the contribution to
return on embedded value from management actions of
writing profitable new business and managing expenses,
persistency, risk and other experience compared to what had
been assumed. Excluding the impact of our managing for
value strategy, this metric reduced to 3.0% from 5.6% in LTS.
Value creation on a reported basis was 2.6% (2011: 5.1%).
One-off restructuring costs and project spend in Old Mutual
Wealth and Emerging Markets reduced the Group Value
Creation by 1.4%, these initiatives will improve Group Value
Creation going forward. The VNB contribution has remained
strong, despite lower sales volumes in Old Mutual Wealth in
H1 2012. The Old Mutual Wealth International business saw
strong VNB in Q4 2012 and we expect to improve the
contribution from cross-border product sales in the future.
Management actions
emerging markets
When we completed our acquisition of Oceanic Life in
Nigeria in February 2013, our experienced integration team
had already been in place for some time. Old Mutual Nigeria
will be the hub for our expansion in West Africa, and we are
looking at further options both in Nigeria and Ghana to gain
scale in the region. In East Africa, we are making progress
with our plans to expand further in Kenya and other
selected markets.
In November 2012, we officially launched the Retail Mass
business in Mexico under the Old Mutual brand. In the same
month we announced the acquisition of a majority stake in
Aiva Business Platforms, a Uruguay-based strategic
distribution business with over $800 million of assets under
management, further increasing our distribution reach in
other emerging markets. The acquisition was completed in
January 2013. In China, Old Mutual-Guodian strengthened
its distribution capabilities through an agreement with
MinSheng Bank.
The Group’s Zimbabwean business was transferred to Old
Mutual South Africa (OMSA) on 1 July 2012 for an initial
consideration of R1.1 billion and a deferred consideration of
R0.5 billion potentially available in 2015, subject to valuation.
We have also agreed the terms of the transfer of the
Colombian and Mexican businesses to OMSA, subject to
regulatory approval. The new organisational structure will
reflect the operational management of the businesses, and
we are in the process of transferring several other emerging
market subsidiaries to align their legal structure with their
operational management.
Following the restructure of the OMIGSA boutiques in
2012, all impacted boutiques are fully operational in the
new structure.
In South Africa the majority of our advisers required to sit
the FAIS regulatory exams have now passed, significantly
mitigating the risk to our sales and retention. We will continue
to support our advisers to pass the exams as part of business
as usual going forward, which will put us in a strong position
to capture the growing opportunity we see in the mass market.
old mutual Wealth
In Q3 2012 we announced the combination of the Skandia
businesses (Skandia UK, Skandia International, OMGI and
the Skandia European businesses outside the Nordic region)
into a single business called Old Mutual Wealth. The
operational changes are designed to combine asset
management capability with UK Platform strength and
cross-border expertise to grow a leading provider of wealth
management solutions in the UK and internationally.
The combination has resulted in significant cost efficiencies,
predominantly from central functions as we reduce duplication
across the business.
As part of the reorganisation we combined SIG, our
multi-manager, with OMAM(UK) to create OMGI, a
profitable asset management capability that can support the
growth and transformation of Old Mutual Wealth. The newly
combined asset manager has achieved run-rate expense
savings and improved operating margins.
We also decided to move to a ‘managing for value’ strategy
in Europe, which will focus management attention on
maintaining the existing books and managing them for
profitability and cash generation, rather than pursuing
pan-European growth. As part of this strategy we closed the
Austrian and German books to new business. The Swiss book
was closed to new business in 2011. We also initiated a cost
reduction programme in France to bring the business to
profitability in the near term. For growth in Europe we will
focus on expanding our cross-border (International) sales,
and improving the profitability of the Italian, French and
Polish domestic businesses.
The RDR came into effect on 1 January 2013. Our focus in
2012 was to ensure that we were compliant and ‘open for
business’ on schedule. In Q4 2012 we launched our new
flexible adviser charging structure and introduced a new
unbundled charging structure for clients on both our onshore
and International platforms. We also implemented the full
set of RDR regulations on our systems. While the
implementation of RDR has resulted in significant
development costs, we believe the post-RDR landscape
will create new opportunities for us.
New UK products launched during the year included the
Generation fund range, an innovative retirement solution,
and a revitalised, gender-neutral protection offering.
Launches in our cross-border International markets included
a new portfolio bond and a structured product in South
Africa and a universal life, high death benefit product for
selected other markets. These products successfully boosted
sales performance through H2 2012. We also began the
roll-out of Wealth Interactive, our new-generation, e-enabled
international investment platform.
35
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Long-term
savings continued
Outlook
emerging markets
Our focus in 2013 will be on strong, profitable sales growth
and new growth opportunities that use the strength and core
competencies of the wider Group. In particular, we see good
prospects to grow our businesses in sub-Saharan Africa –
where we believe the recent economic growth is a
sustainable, long-term trend. We will explore means for
organic and inorganic growth in this region – leveraging our
established business bases in South Africa, Namibia, Kenya
and Zimbabwe, whose expertise will enable us to design and
export relevant products and low-cost IT infrastructure into
new markets.
Economic growth for the whole of sub-Saharan Africa is
expected to average around 5% in real terms. This growth in
consumer and urban wealth is supported by substantial
long-term demographic trends and provides good prospects
for our business. Despite a moderately improved global
outlook, real GDP growth in South Africa is expected to be
below 3%. The ANC Conference in December 2012 accepted
a number of pragmatic policy decisions and the National
Development Plan as the backbone of future government
economic policy, paving the way for growth-enhancing
policy reforms.
Despite Moody’s downgrade of South Africa’s sovereign
rating and the resulting downgrade of Old Mutual Life
Assurance Company South Africa’s (OMLAC(SA)) Global
Insurance Financial Strength rating from A1 (negative) to
A3 (negative), OMLAC(SA) remains one of South Africa’s
highest-rated institutions. We continue to explore ways of
managing our balance sheet structure to provide long-term
capital flexibility.
The Group’s general insurance businesses in the Rest of
Africa will be managed as part of the operations of Old
Mutual Emerging Markets in the countries in which they are
situated. We will continue to reflect both Long-Term Savings
and the general insurance businesses in our Rest of Africa
KPIs and targets going forward.
old mutual Wealth
Our priority in 2013 is to embed the strategic decisions taken
in 2012 and continue the implementation of all aspects of our
Simplify, Unify and Grow plan.
We believe the UK market for retail financial services will
continue to develop as advisers fully implement new business
models. In the short term, UK conditions will inevitably be
challenging as advisers and customers adapt to the post-RDR
world notwithstanding that the UK equity market conditions
have been positive for the first two months of the year. We
expect it to be characterised by a combination of whole-of-
market (independent) advice and more parameterised
(restricted) advice. We see opportunities to service both these
models and will support both. Our new focused fund range,
due for launch later in the year, will be a key solution for
advisers in the post-RDR world. We have reorganised our UK
sales force to match the market’s future shape and needs.
Changing regulation is also a strong theme in International
markets, with Singapore’s Financial Advisory Industry Review
and similar initiatives emerging in other markets. We
launched new products and new distribution relationships
with a number of major banks and stockbrokers in South
Africa, UK, Hong Kong and the Middle East in 2012. We have
a strong pipeline of similar deals we are pursuing, all of
which will strengthen our distribution footprint and improve
access to mass affluent and high-networth customers in local
markets. We believe this will support positive sales momentum
in 2013. We also look forward to further strengthening our
long-standing relationship with Aiva, the Latin American
distribution business recently acquired by Old Mutual
Emerging Markets.
We expect to incur further non-recurring restructuring costs
in 2013 to execute the strategy. Several programmes
to improve efficiency are already underway: for example,
we are assessing ways to cut the cost of technology and
administration on our heritage books to reflect the reducing
policy count inherent in a closed-book model.
We are confident that OMGI is well placed to meet investors’
needs in 2013, following our work to strengthen its marketing,
product and sales functions, as well as its excellent investment
performance in 2012. We have seen some redemptions from
OMGI following the sale of the Group’s Nordic business and
we expect these to continue in 2013.
Following the change of strategy for our European business,
we expect to see a continued slowdown in sales across
Germany, Austria and Switzerland. Poland and France
both had reduced sales, in challenging market conditions.
Italy continued to perform well finishing 2012 strongly, with
early indications suggesting this will continue into 2013.
Emerging Markets data tables (South African rand)
adjusted operating profit
Retail Affluent
Mass Foundation Cluster
Corporate
Rest of Africa
Latin America & Asia
LTIR
Life and savings
OMIG(SA)1
Central expenses and administration
total emerging markets
2012
2,725
1,621
1,127
561
218
1,613
7,865
933
(924)
7,874
2011
2,377
1,529
693
404
225
1,308
6,536
723
(618)
6,641
rm
% change
15%
6%
63%
39%
(3)%
23%
20%
29%
(50)%
19%
1
From 2012, Old Mutual Unit Trusts is reported as part of Retail Affluent only and no longer also as part of OMIG(SA), together with a subsequent elimination within central
expenses. Prior year comparatives have been restated accordingly.
36
Old Mutual plcAnnual Report and Accounts 2012 gross sales
Retail Affluent
Mass Foundation Cluster
Corporate
OMIG(SA)
total south africa
Rest of Africa
Latin America & Asia
total emerging markets
aPe sales
By cluster:
south africa
Mass Foundation Cluster
Retail Affluent
Corporate
2012
49,677
6,796
15,152
34,820
106,445
10,804
34,792
152,041
rm
2011
% change
42,139
5,889
12,619
30,729
91,376
8,952
21,550
121,878
18%
15%
20%
13%
16%
21%
61%
25%
rm
single premium aPe
gross regular premiums
total aPe
2012
2011
% change
2012
2011
% change
2012
2011
% change
total south africa
1,610
rest of africa
Latin america & asia1
133
24
2
956
652
3
1,064
503
1,570
123
22
(33)%
(10)%
30%
3%
8%
9%
2,441
1,529
486
4,456
480
105
2,017
1,442
427
3,886
408
89
21%
6%
14%
15%
18%
18%
2,443
2,485
1,138
6,066
613
129
2,020
2,506
930
5,456
531
111
21%
(1)%
22%
11%
15%
16%
total emerging
markets
1,767
1,715
3%
5,041
4,383
15%
6,808
6,098
12%
1
Latin America & Asia represents Mexico only.
By product:
emerging markets
Savings
Protection
Annuity
total emerging
markets
non-covered sales
South Africa
Rest of Africa
Latin America & Asia
total emerging
markets
single premium aPe
gross regular premiums
total aPe
2012
2011
% change
2012
2011
% change
2012
2011
% change
rm
1,234
–
533
1,388
–
327
(11)%
–
63%
2,525
2,516
–
2,196
2,187
–
1,767
1,715
3%
5,041
4,383
15%
15%
–
15%
3,759
2,516
533
3,584
2,187
327
6,808
6,098
5%
15%
63%
12%
rm
Unit trust/mutual fund sales
other non-covered sales
total non-covered sales
2012
26,422
5,457
32,161
2011
% change
20,934
4,778
19,401
26%
14%
66%
2012
46,851
3,286
2,098
2011
% change
39,709
1,464
1,691
18%
124%
24%
2012
73,273
8,743
34,259
60,643
6,242
21,092
2011
% change
64,040
45,113
42%
52,235
42,864
22%
116,275
87,977
21%
40%
62%
32%
37
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Long-term
savings continued
old mutual Finance
Lending book (gross)
Sales
NPAT/average lending book1
Loan approval rate
Impairments: average lending book
Branches
Staff
2012
6,431
5,482
3.8%
34.2%
13.3%
201
1,821
2011
5,699
5,261
3.4%
33.6%
12.9%
172
1,421
rm
% change
13%
4%
17%
28%
1 Net profit after tax (NPAT)/average lending book is stated after capital charges.
2012 sales reflected our conservative approach to lending, following evidence of increased client debt levels. Impairment provisions rose 0.4%,
following a change in the maturity profile of the loan book.
Old Mutual Wealth data tables (sterling)
adjusted operating profit
Core markets
UK Platform
International
OMGI1
total core markets
manage for value markets
UK Heritage
Old Mutual Wealth Europe – open book2
Old Mutual Wealth Europe – closed book3
total manage for value
total old mutual Wealth
1 OMGI includes OMAM(UK) AOP of £2 million in 2011.
Includes business written in France, Italy and Poland.
2
Includes business written in Germany, Austria and Switzerland.
3
gross sales and funds under management
Core markets
UK Platform
International1
OMGI
total core
manage for value markets
UK Heritage
Old Mutual Wealth Europe – open book
Old Mutual Wealth Europe – closed book
total manage for value
Elimination of intra-Group assets
total old mutual Wealth
2012
2011
% change
£m
2
68
3
73
92
(4)
34
122
195
(4)
79
9
84
100
3
38
141
225
n/m
(14)%
(67)%
(13)%
(8)%
n/m
(11)%
(13)%
(13)%
1-Jan-12
gross sales
redemptions
net flows
18.8
14.3
12.1
45.2
14.3
5.2
4.3
23.8
(6.4)
4.1
1.7
4.8
10.6
1.3
1.2
0.6
3.1
(1.8)
62.63
11.92
(1.9)
(1.5)
(4.5)
(7.9)
(2.5)
(0.8)
(0.4)
(3.7)
1.7
(9.9)
2.2
0.2
0.3
2.7
(1.2)
0.4
0.2
(0.6)
(0.1)
2.0
market
and other
movements
£bn
31-Dec-12
1.6
(0.4)
1.4
2.6
1.0
0.5
–
1.5
0.5
4.6
22.6
14.1
13.8
50.5
14.1
6.1
4.5
24.7
(6.0)
69.2
International FUM ‘market and other movements’ includes an outflow of £1.1 billion of assets following the sale of Finland.
1
2 Gross sales included £0.3 billion of Q1 2012 sales in respect of OMAM(UK).
3 Opening FUM includes OMAM(UK) FUM of £4.0 billion.
38
Old Mutual plcAnnual Report and Accounts 2012 total core
3,386
3,615
(6)%
gross single premiums
gross regular premiums
£m
total aPe
2012
2011
% change
2012
2011
% change
2012
2011
% change
1,610
363
1,973
168
1,245
1,413
1,649
407
2,056
209
1,350
1,559
(2)%
(11)%
(4)%
(20)%
(8)%
(9)%
166
1,053
255
863
(35)%
22%
27
42
(36)%
1,246
1,160
7%
32
–
32
13
27
40
72
33
19
23
75
38
–
38
26
26
52
(16)%
–
(16)%
(50)%
4%
(23)%
193
36
229
30
151
181
203
40
243
47
161
208
(5)%
(10)%
(6)%
(36)%
(6)%
(13)%
90
(20)%
410
451
(9)%
43
25
48
(23)%
(24)%
(52)%
116
(35)%
50
124
26
200
69
(27)%
111
12%
52
(50)%
232
(14)%
4,632
4,766
(3)%
147
207
(29)%
610
683
(11)%
aPe sales
Core markets
UK market
Pensions
Bonds
total UK Platform
international
Unit-linked
Bonds
total international
manage for value
markets
UK Heritage
Old Mutual Wealth Europe
– open book
Old Mutual Wealth Europe
– closed book
total manage for
value
total old mutual
Wealth
non-covered sales1
Core markets
UK market
Mutual funds
ISA
total UK Platform
OMGI2
total core
manage for value markets
UK Heritage
Old Mutual Wealth Europe – open book
Old Mutual Wealth Europe – closed book
total manage for value
2012
2011
% change
rm
1,144
923
2,067
3,040
5,107
736
30
9
775
1,652
1,159
2,811
2,221
5,032
704
29
20
753
(31)%
(20)%
(26)%
37%
1%
5%
3%
(55)%
3%
total old mutual Wealth
5,882
5,785
2%
1 Non-covered sales included unit trust, mutual fund and other non-covered sales.
2 To allow comparison on a like for like basis, OMGI’s non-covered sales includes sales of £1,403 million from OMAM(UK) in 2012, including £270 million of sales in Q1 2012,
and £1,096 million in 2011.
39
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Long-term
savings continued
Emerging Markets
Old Mutual South Africa (OMSA) is one of
the largest and longest-established financial services
providers in South Africa – providing individuals,
businesses, corporates and institutions with long-term
savings, protection and investment solutions.
Key financial highlights
adjusted operating profit (pre-tax)
£605m
2011: £570m
Funds under management
£52.6bn
2011: £49.9bn
Return on Equity (RoE)
(%)
2012
2011
NCCF
(£bn)
2012
2011
APE sales
(£m)
2012
2011
MCEV (covered business)
(£m)
2012
2011
24
24
1.2
0.4
523
524
3,296
3,167
Non-covered sales
(£m)
2012
2011
Value creation –
(VNB+experience variance)/MCEV (%)
8,937
7,559
2012
2011
3.5
6.8
In South Africa we are experienced in developing products
for sophisticated markets as well as simple products for
low-income markets, and we have experience in pricing
diverse risks. We run and have a comprehensive
understanding of multiple distribution channels. We are
leveraging this business – by sharing product experience,
people and professional skills, systems and processes, and
distribution knowledge – into our businesses in other
high-growth economies in Africa, Latin America and Asia.
In Latin America we operate in Mexico and Colombia,
where we offer customers direct asset management and
fund selection for portfolio building and open architecture
products. In sub-Saharan Africa we operate across a broad
range of countries including Namibia, Zimbabwe, Nigeria,
Malawi, Kenya and Swaziland. In Asia we operate joint
ventures with Kotak Mahindra Bank in India and Guodian
Capital Holdings in China.
Emerging Markets includes Old Mutual Investment Group
(SA) OMIG(SA), a multi-boutique investment house.
Its independent, performance-driven boutiques offer
a comprehensive spread of investment styles, including
specialist equity, infrastructure, socially responsible investing,
active asset allocation, fixed income and value. Old Mutual
Specialised Finance (OMSFIN) is a proprietary investment
business and alternatives investment manager operating
alongside OMIG(SA)’s independent investment boutiques.
strategy
Emerging Markets has a well established strategy focused on:
■ Reducing the costs in the Retail Affluent legacy books and
rationalising our Corporate administration platforms and
fund options
40
■ Fully integrating our South African Wealth
Management proposition
■ Continuing growth in the Mass Foundation Cluster
■ Accelerating growth in African operations, mostly
through acquisitions that add significant scale or through
distribution partners (directly or through the Africa
Strategic Investment Fund)
■ Continuing investment in Mexico’s mass market business
and growth of the retail affluent business in Mexico.
Case study
Doing well by doing good
through responsible investing
The Futuregrowth Agri-Fund in South Africa (a joint venture with UFF Agri
Asset Management) provides long-term returns and a tangible social and
development benefit through supporting the land reform process in South
Africa. In 2012, the Fund’s efforts to run its investments responsibly were
rewarded when farm workers did not participate in the strikes that erupted
in South Africa’s Western Cape Province. The Fund’s investment process
means that workers are already paid a fair wage and a portion of
invested capital is spent on education and healthcare programmes to
empower workers and create independent emerging farmers. The nature
of the farming done in the Fund’s investments tends to be labour intensive,
and job creation through developing additional land remains a long-term
aim of the Fund.
For more information on the Group’s Responsible Business
activities see pages 10-11
Old Mutual plcAnnual Report and Accounts 2012 Our strategy in action:
Going forward:
1. improve the customer proposition and experience
1. improve the customer proposition and experience
Significant progress towards Treating customers fairly (TCF)
implementation in 2014.
Heavy investment in a CRM capability to drive deeper
understanding of our customers.
New product launches included an enhanced Greenlight disability
product suite and the SmartMax education savings product.
Grew customer numbers 12% in Africa and 3% in South Africa and
improved our customer experience, as evidenced by Net promoter
score (NPS) feedback.
2. Deliver high performance
Excellent financial results in a challenging economic climate, with
strong growth in sales and net client cash flow.
High growth in our Mass Foundation Cluster business, cementing
our leadership position in this market segment.
Continued investment in growing both the life and non-life parts of
this business.
3. share skills and experience across the group
Launched the Retail Mass business in Mexico under the
Old Mutual brand, strengthening the emerging markets franchise
in Latin America by leveraging our South African capabilities in
this market segment.
4. Build a culture of excellence
Old Mutual came second in the large company category of
the annual Deloitte Best Company To Work For Survey.
Named as best large employer in South Africa in the Corporate
Research Foundation Institute’s annual Best Employers Certification
Index for 2012/13.
5. grow our penetration of and presence
in selected emerging markets
Acquired Oceanic Life in Nigeria and progressed well in
integrating it with Old Mutual Nigeria.
In Latin America, successfully concluded the acquisition of a
majority stake in Aiva Business Platforms to further strengthen our
presence and distribution capability in Latin America.
Established a strategic investment fund to accelerate growth in new
African markets, alongside relevant strategic partners.
6. operate as the most trusted partner
in the communities in which we serve
Achieved Level 2 BBBEE status for the third year in a row
and reached agreement with Zimbabwean government on
indigenisation, benefiting staff, client and staff pensioners, a Youth
Fund and other strategic partners.
Launched a series of Socially Responsible Investment funds and
adopted the UN Principles for Responsible Investment. Gave over
250,000 people financial education and money management
training in South Africa.
7. simplifying structure
Consolidated seven South African wealth management businesses
into one integrated business.
Simplified OMIG(SA)’s boutique structure.
Agreed the terms of the transfer of the Group’s Zimbabwean,
Colombian and Mexican businesses to OMSA, subject to regulatory
approval. The new organisational structure will reflect the
operational management of the businesses.
Launch a new integrated South African Wealth Management
proposition.
Implement revised customer value propositions to our existing
(and new) customers, enabled by our CRM capability and
investment in an integrated customer service and intermediary
sales enablement strategy.
2. Deliver high performance
Continue to focus on delivery of financial targets and diversification
of earnings across emerging markets by accelerating growth
in Africa.
In South Africa, drive synergies and extract efficiencies
across business units towards strong, more profitable market
positions. Continue to invest in improving OMIGSA equity
investment performance.
3. share skills and experience across the group
Continue to leverage our capabilities in tied distribution, capital
intensive/guaranteed products and low-cost administration across
emerging markets.
In Africa specifically, continue to roll out our Business in a Box model
towards better standardisation and unit cost efficiencies. Explore
opportunities to take advantage of synergies with other businesses
in the Group such as M&F.
4. Build a culture of excellence
Continued focus on attracting, retaining and deploying specific
talent pools to strengthen the South African base and drive growth
in emerging markets, with particular focus on Africa.
5. grow our penetration of and presence
in selected emerging markets
Continue to grow scale and expand in East and West Africa
while selectively entering other attractive South African
Development Community (SADC) countries, and set aside capital
of R5 billion for this purpose.
6. operate as the most trusted partner
in the communities in which we serve
Continue to drive achievement of our targets and commitments
to South African stakeholders.
Continue to invest significantly in job creation, skills development
and basic education, specifically in maths and science, in
conjunction with various partners and schools.
Embed and implement a sustainability strategy across our business.
7. simplifying structure
Consolidate Mutual & Federal (M&F) Africa into Old Mutual Africa.
Continue identifying opportunities to simplify the business and
execute this strategy.
Progress the transfer of various other emerging markets subsidiaries
to align their legal structure with their operational management.
41
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Long-term
savings continued
Old Mutual Wealth
Across all markets, our core capabilities include
strong distribution relationships, product and
solution design, and service quality.
Key financial highlights
adjusted operating profit (pre-tax)
£195m
2011: £223m
Funds under management
£69.2bn
2011: £58.6bn
Return on Equity (RoE)
(%)
2012
2011
NCCF
(£bn)
2012
2011
APE sales
(£m)
2012
2011
MCEV (covered business)
(£m)
2012
2011
13
16
2.0
2.8
610
683
2,444
2,546
Non-covered sales
(£m)
2012
2011
Value creation –
(VNB+experience variance)/MCEV (%)
5,612
4,689
2012
2011
1.7
4.0
Our focus is on delivering strong investment performance
through our own investment management capabilities and
customer-focused investment solutions that deliver positive
outcomes for customers through open architecture
propositions. Clients can access our solutions through
unit-linked life insurance, pensions, unit trusts and cross-
border product wrappers.
During 2012 we announced the formation of the new, unified
Old Mutual Wealth business, which brings together our:
■ UK Life business
■ UK Retail Advice Platform business
■ Continental European businesses predominantly based in
Germany, Austria, Poland, France, Italy and Switzerland
■ Cross-border International business
■ Two asset management businesses: Skandia Investment
Group (SIG), a multi-manager and investment packaging
business, and Old Mutual Asset Managers UK
(OMAM(UK)), a directly-invested equity, bond and
alternatives business.
Combining the above into one unified business, supported
by a strong and profitable asset management capability,
will allow us to further develop our own wealth solutions
– in turn enabling us to capture a greater share of the value
chain. The combined business has one management team,
one governance structure, one vision and one strategy.
Unifying the businesses has also supported our strategy by
reducing the cost base.
strategy
Last year marked the beginning of our next phase of growth.
Paul Feeney was appointed CEO in August 2012, and in
November 2012 we announced our strategy and targets for
the next three years. The strategy will create a modern, vertically
integrated wealth management and asset management
business delivering capital-efficient, customer-focused
investment and risk solutions through our market-leading
platforms. Over the next three years we will unify the business,
simplify it to focus on key markets, and grow in these markets.
Unify
Unifying the business enables us to reduce our cost base
and create scale opportunities. We announced in the second
half of 2012 that we are reducing our UK headcount by
around 200, predominantly in central support areas.
This programme is now materially complete and, together
with further opportunities to rationalise infrastructure,
will contribute towards a strong improvement in our UK
Platform’s operating margin. The unification of SIG and
OMAM(UK) has given us improved operational scale and
renewed commercial focus.
Simplify
Our strategy involves simplifying not only our structure but
also our strategic agenda. We believe we can unlock value
by focusing on our core UK and cross-border International
growth markets, while moving to a ‘manage for value’
strategy in Continental Europe.
42
Old Mutual plcAnnual Report and Accounts 2012 Our strategy in action:
Going forward:
1. improve the customer proposition and experience
1. improve the customer proposition and experience
Launched RDR-compliant proposition for UK.
Launched new-generation e-enabled international platform Wealth
Interactive.
Revitalised our UK protection suite.
Launched new-generation funds for the at- and in-retirement market.
Launch Select fund range for the post-RDR advice market.
Develop asset management capability.
Roll-out Wealth Interactive.
Improve digital connectivity with clients.
Maintain product and service innovation.
2. Deliver high performance in all markets
2. Deliver high performance in all markets
Delivered return on capital and cost saving targets set in 2010.
Announced ‘manage for value’ strategy in Continental Europe
and began implementation.
Merged SIG and OMAM(UK) – now running at 14% operating margin.
Manage efficiency and persistency in Europe to improve
profitability and generate cash.
Deliver profit, RoE and operating margin targets.
Return surplus capital to shareholders.
3. share skills and experience across the group
3. share skills and experience across the group
Collaborated with Old Mutual South Africa to implement customer
service metrics and net promoter score programme in Operations.
4. Build a culture of excellence
UK and International businesses received several awards for
excellence including ‘Best platform’ and ‘Best international life
group’. UK business awarded five stars in Investments and Life and
Pension categories at Financial Adviser Service Awards – as well
as awards for ‘Best wrap/platform’ and ‘Best online provider’.
Old Mutual Wealth Europe won customer service awards in Austria
(for the 10th year running) and France.
5. simplify our structure
Unified UK, International, Continental Europe and Asset
Management businesses into one business with clear focus
and reduced cost base. Concluded sale of Finnish branch.
Continue learning from other parts of the business as unification
of the business is embedded.
Collaborate closely with Emerging Markets on our digital strategy.
4. Build a culture of excellence
Continue to improve service delivery through (among others)
LEAN, our Casanovas customer service initiative, and net
promoter score programmes.
Retain and develop talent in the asset management business.
5. simplify our structure
Focus on core markets (UK and International cross-border),
and on managing for value in Europe.
This manage for value strategy involves moving to a closed
book model for our retail portfolio in Switzerland, Austria
and Germany, with an emphasis on persistency and cost
management to maximise cash generation. We still see
growth prospects in Italy and Poland, where we will focus
on developing profitability while balancing the associated
capital demands. We will also seek further growth in our
European cross-border International sales.
Grow
Our growth will be driven by innovation and further
development of our distribution capability.
Innovation
Developing investment management and risk solutions built
around customer needs will remain a key focus for us over
the next three years. Significant initiatives already delivered
in 2012 include our new Generation investment range: an
at- and in-retirement proposition providing defined levels of
income with elements of capital preservation and protection
against inflation. We have also revitalised our insurance
protection suite, with streamlined application and
underwriting processes and first mover advantage
on gender neutral pricing.
We have completed development of Select – a range of
high quality funds for the UK post-RDR market, managed
by leading investment managers – for launch in 2013. Select
delivers not only our own investment range but also on those
of selected partners, enabling financial advisers to build
client investment portfolios with funds from the best managers
at competitive prices.
New products and offerings launched in our International
markets included a portfolio bond and structured product for
the South African market, a portfolio builder tool for advisers
and a universal life high death benefit product for selected
markets. We have also begun the roll-out of Wealth
Interactive, our new-generation, e-enabled international
investment platform.
Old Mutual Global Investors (OMGI), already has a strong
offering in UK fixed income, UK and European equities and
multi-manager (risk targeted, diversified growth and income
generation) asset classes. Our focus over the next three years
is to develop further fit-for-market capabilities in these and
other asset classes in line with investor needs.
Distribution
Our growth strategy also includes securing and growing
distribution in the UK and our international markets for our
cross-border propositions.
Our core route to market is through financial advisers. We will
continue to provide them with tools and investment solutions
that allow them to serve their clients. We will seek to partner
closely with them, and to establish new relationships that
allow us to broaden our distribution reach. We also look
forward to further developing our long standing relationship
with Aiva, the Latin American distribution network recently
acquired by Old Mutual Emerging Markets.
We are complementing our adviser offering with further
development of our digital connection with clients, so that
they can interact with us in whichever manner they prefer.
43
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed BanKing
Nedbank is one of the four largest banking
groups in South Africa measured by assets,
with a strong deposit franchise and over
six million clients.
Key financial highlights
adjusted operating profit (pre-tax
and pre-nCi)
£828m
2011: £755m
total assets
£49.4bn
2011: £51.4bn
number of employees
28,767
2011: 28,494
Return on Equity (excl. goodwill)
(%)
2012
2011
Net Interest Income
(£m)
2012
2011
Non-interest revenue
(£m)
2012
2011
Net interest margin
(%)
2012
2011
Credit loss ratio
(%)
2012
2011
16.4
15.3
1,513
1,549
Common equity Tier 1 ratio
(Basel II.5) (%)
1,332
1,324
2012
2011
3.53
3.48
1.05
1.13
11.4
10.5
Overview
Nedbank is listed on the Johannesburg and Namibian Stock
Exchanges, with a market capitalisation of £6.9 billion at the
end of 2012. Old Mutual has a majority shareholding and
owned 52% of Nedbank at 31 December 2012.
Focused on southern Africa and positioned as a bank for all,
we provide a wide range of wholesale and retail banking
services and a growing insurance, asset management and
wealth management offering through five main business
clusters: Nedbank Capital, Nedbank Corporate, Nedbank
Business Banking, Nedbank Retail and Nedbank Wealth.
Our vision is to build Africa’s most admired bank – admired
by staff, clients, shareholders, regulators and communities.
Our key strategic areas for growth include repositioning
Nedbank Retail, growing non-interest revenue and
implementing the portfolio tilt strategy, which has been
designed to focus on business activities that generate higher
Economic Profit. In the rest of Africa we recently deepened
our strategic alliance with Ecobank and secured rights to
acquire up to 20% of Ecobank Transnational within two
years as part of a financing package for Ecobank’s
transformational banking acquisition in Nigeria.
We are integrating economic, environmental, social and
cultural sustainability across our businesses. As Africa’s first
carbon-neutral financial services organisation we are widely
recognised for sustainability leadership. We are known as
South Africa’s ‘green bank’ and continue to play a leading
role in environmental issues by maintaining carbon neutrality,
promoting water stewardship and being a signatory to the
CEO Water Mandate Caring for Climate Programme of the
United Nations Global Compact.
Headquartered in Sandton, Johannesburg, we have large
operational centres in Durban and Cape Town, a regional
branch network throughout South Africa and facilities in
other southern African countries including Namibia and
Zimbabwe. These facilities are operated through eight
affiliated banks and subsidiaries, and through branches
and representative offices in global financial centres that
meet the international banking requirements of our
South African multinational clients.
Strategy
The Nedbank Group strategy is outward-looking, focused
on growing the franchise and delivering its objectives of
repositioning Nedbank Retail, growing non-interest revenue
(NIR), implementing the portfolio tilt strategy and expanding
into the rest of Africa.
44
Old Mutual plcAnnual Report and Accounts 2012 Our strategy in action:
Going forward:
1. improve the customer proposition and experience
1. improve the customer proposition and experience
Gave clients access to the widest African geographic banking
network and most compelling value proposition through our own
network in SADC/East Africa and partnerships across the continent
and key trade corridors.
Repositioned Nedbank Retail by focusing on client-centred banking
experiences and using digital innovation.
Delivered new brand, positioning Nedbank as a ‘bank for all’,
aspirational and accessible.
Continue to grow our business in SADC/East Africa and to focus on
maximising opportunities with Ecobank in West and Central Africa.
Execute business-specific initiatives aimed at delivering a choice of
distinctive client-centred banking experiences across clients’
channels of choice.
Build on our existing differentiated brand strategy and client value
propositions to accelerate quality client gains and usage of
innovative products and channels.
2. Deliver high performance
2. Deliver high performance
Strong primary client gains.
Strong growth in NII, NIR and AOP during 2012.
Strong capital management.
3. share skills and experience across the group
Playing a key role in the Group Co-operation Forum, established
in 2012 to identify and track collaboration between Old Mutual
Group businesses.
4. Build a culture of excellence
Continued to build on our strong empowerment credentials (Level 2)
– unlocking the benefits resulting from this and working with our
BEE partners.
Continue a variety of initiatives currently underway to facilitate and
optimise client-centricity.
Pursue initiatives promoting greater innovation, IT-enabled business
process re-engineering and integrated channels to continue
growing NIR efficiently.
3. share skills and experience across the group
Continue regular and frequent interactions to discover new
opportunities, including exploring:
■ Corporate Finance M&A opportunities and referrals
■ Potential transactions with OMIG(SA) boutiques
■ Treasury deposits within Group
■ Transactions in response to Solvency II and Basel III regulatory
5. maintain high involvement in the community
requirements.
and environment
Established leadership position in South African corporate
responsibility and sustainability – reflected in membership of
industry leading bodies and widespread recognition.
Identify potential synergies from working with Emerging Markets and
M&F in the Rest of Africa.
Track and report collaboration initiatives through the Group
Co-operation Forum.
4. Build a culture of excellence
Continue investing in the training and development of all our
people to achieve an all-inclusive culture.
5. maintain high involvement in the community
and environment
Pursue Nedbank Fairshare 2030. We developed this high level
framework to launch a co-ordinated approach throughout
Nedbank, creating a more sustainable society for future
generations. Its goals align with those of the National Development
Plan (NDP) 2030.
45
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed BanKing
continued
Business profile
nedbank Capital
nedbank Corporate
nedbank Business Banking
Provides comprehensive investment banking
solutions to institutional and corporate clients.
Its product strengths include investment banking,
leverage financing, trading, broking, structuring
and hedging. It has offices in South Africa and
London and representative offices in Angola
and Toronto.
Provides full-service corporate banking to
large corporates with an annual turnover
over R400 million, including commercial,
industrial and property finance solutions.
Includes operations servicing both retail and
corporate market segments in Lesotho, Malawi,
Namibia, Swaziland and Zimbabwe through
Nedbank Africa.
Provides commercial banking solutions for
small- to medium-sized businesses (annual
turnover R7.5 million to 400 million), with a holistic
offering for the business, business owners/
households and employees.
nedbank retail
Serves the financial needs of individuals
and small businesses (annual turnover up to
R7.5 million), providing transactional, card,
lending and investment products and services.
This cluster also services merchants and large
corporates in respect of card-acquiring services.
nedbank Wealth
Comprises three divisions – Insurance, Asset
Management and Wealth Management – with
offices in South Africa, London, the Isle of Man,
Jersey, Guernsey and the Middle East.
Comprises:
■ Investment Banking
■ Global Markets
■ Treasury
■ Client Coverage.
Comprises:
■ Corporate Banking
■ Property Finance
■ Transactional Banking
■ Corporate Shared Services.
Comprises:
■ Four geographically decentralised client-
facing business units
■ A strategic business unit including specialised
finance, debtor management and client value
propositions
■ Specialist services, including investment
management, transactional banking sales,
finance and business intelligence/client value
management, HR, finance and risk functions.
Comprises:
■ Secured lending, including home loans and
vehicle finance
■ Retail relationship banking, which combines
personal relationship banking and small
business services
■ Consumer banking, which comprises client
engagement (client insight, value
management, CVPs, digital innovation,
transactional and investments), integrated
channels and personal loans
■ Card issuing and acquiring.
Comprises:
■ Wealth Management, including private
banking and fiduciary services locally and
internationally, as well as stockbroking and
financial planning
■ Asset Management, including the Nedgroup
Investments range of local and international
best of breed unit trusts, cash solutions and
multi-management as well as private client
active management and research supporting
high-networth clients and stockbroking
businesses
■ Insurance, including short-term insurance.
46
Old Mutual plcAnnual Report and Accounts 2012 Highlights
AOP (IFRS basis, pre-tax)
AOP (IFRS basis, pre-tax) (£m)
Headline earnings1
Net interest income1
Non-interest revenue1
Net interest margin1
Credit loss ratio1
Cost to income ratio1
Return on Equity1
Return on Equity (excluding goodwill)1
Basel II.5 common equity Tier 1 ratio1,3
2012
10,773
828
7,510
19,680
17,324
3.53%
1.05%
55.5%
14.8%
16.4%
11.4%
rm
2011
% change
23%
10%
21%
9%
12%
8,791
755
6,184
18,034
15,412
3.48%2
1.13%
56.6%
13.6%
15.3%
10.5%
1 As reported by Nedbank in its report to shareholders for year ended 31 December 2012.
2 Restated from 3.46% to exclude clients’ indebtedness for acceptances from interest-earning banking assets to align with the rest of the industry.
3 2011 is presented on pro-forma Basel II.5 basis.
Banking and economic environment
South Africa’s GDP is expected to have grown at around
2.5% in 2012 after expanding 3.1% in 2011. Concerns around
the operating environment and infrastructure constraints, the
widening current account deficit, rising national debt, higher
inflation, high levels of unemployment and declining trends in
competitiveness with wage settlements outpacing productivity
were included in the rationale by international rating
agencies Moody’s, Standard & Poor’s and Fitch Ratings for
the downgrade of South Africa’s sovereign-debt rating, which
in turn placed pressure on the rand. Domestic bond yields
have, however, remained stable.
Households remained the primary driver of private sector
credit demand, with the unexpected 50 basis points (bps)
reduction in interest rates in July 2012 providing some relief
for highly indebted consumers against rising electricity, food
and fuel costs. Growth rates in unsecured lending are slowing
as expected.
Corporate credit demand improved towards the end of the
year as the recovery in public sector infrastructure spending
supported industries producing capital goods and other
inputs for local projects, although corporates on the whole
remained cautious, constrained by a weak eurozone and
a relatively sluggish domestic economic environment.
Review of results
Nedbank made excellent progress in delivering on its
strategic focus areas, producing a strong set of results for
the year ended 31 December 2012. The results reflect an
improvement in all key performance indicators and headline
earnings growth in all business clusters.
Headline earnings grew 21.4% to R7,510 million (2011: R6,184
million), driven by good revenue growth, an improving credit
loss ratio (CLR) and responsible expense management while
investing for growth.
Diluted headline earnings per share increased 19.0% to
1,595 cents (2011: 1,340 cents) and diluted earnings per share
increased 18.4% to 1,588 cents (2011: 1,341 cents). In line with
the earnings guidance range provided in Nedbank’s trading
statement released on 20 February 2013, Nedbank recorded
headline earnings per share and basic earnings per share of
1,646 and 1,638 cents per share respectively.
Nedbank generated economic profit (EP) of R1,511 million,
up 63.5% (2011: R924 million). The RoE excluding goodwill,
increased to 16.4% (2011: 15.3%) and RoE increased to 14.8%
(2011: 13.6%), with the return on assets (RoA) increasing to
1.13% (2011: 0.99%).
Nedbank is well capitalised, with its Basel II.5 common equity
Tier 1 ratio at 11.4% (2011: pro-forma Basel II.5 ratio 10.5%).
With the introduction of Basel III on 1 January 2013, the pro
forma Basel III common equity Tier 1 ratio at 31 December
2012 is a robust 11.6%. Funding and liquidity levels remained
sound. Surplus liquidity buffers were maintained at a level of
around R24 billion and the average long-term funding ratio
increased to 26.0% (2011: 25.0%) in Q4 2012.
The net asset value per share continued to increase, growing
9.7% to 11,798 cents at 31 December 2012 (2011: 10,753 cents).
Delivering sustainability to all
our stakeholders
Nedbank has developed a strategic framework that will
enable delivery of its vision of building Africa’s most admired
bank by all its stakeholders and assist in creating a vibrant
and flourishing South Africa through appropriate alignment
of its activities with the National Development Plan (NDP).
This is underpinned by a firm belief that its long-term success
is inextricably linked to its ability to fulfil its social purpose.
Nedbank is committed to delivering sustainable value to all
its stakeholders as demonstrated by the following highlights
for 2012:
■ For staff – creating over 450 new permanent jobs in South
Africa, investing R352 million in the development of staff
and supporting more than 1,300 managers through its
personal mastery and team effectiveness programme
known as ‘Leading for Deep Green’ and 8,500 staff
through its Batho Pele diversity programme. This focus on
values-based behaviour has led to higher levels of staff
morale and an ongoing positive shift in corporate culture,
now measuring at world-class levels.
47
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed BanKing
continued
■ For clients – paying out R144 billion in new loans up 24.1%
on 2011; launching various market-leading innovations
such as the Nedbank App Suite™, MyFinancialLife™, Small
Business Friday™ in association with the National Small
Business Chamber, cash management solutions and
longer-term deposit products; providing great-value
banking and saving clients R163 million through the use of
bundled products; increasing its footprint by 80 net new
staffed outlets and 476 net new ATMs; and achieving
multi-year highs in client satisfaction as measured by Net
Promoter Scores across Nedbank. As a result, more clients
chose to bank with Nedbank, resulting in a net gain of
655,000 new retail clients in the year, including 377,000
entry-level banking clients, 165,000 middle-market clients,
1,113 high-networth clients, 775 and 27 new business
banking and corporate primary-banked clients,
respectively. Nedbank was recognised by Euromoney as
the best bank in South Africa in 2012.
■ For shareholders – delivering R1,511 million EP, generating
a 34.3% total shareholder return and a total dividend
increase of 24.3%, as well as maintaining excellence
in transparency and reporting as acknowledged by
numerous reporting awards. We have created an
opportunity for shareholders to participate in the Africa
growth story through its rights to acquire 20% in Ecobank
Transnational Incorporated (ETI).
■ For regulators – increasing capital levels further and being
well positioned for the implementation of Basel III on
1 January 2013 and the Solvency Assessment and
Management regime on 1 January 2015, making cash
taxation contributions of R6.2 billion relating to direct,
indirect and other taxation and supporting the National
Treasury in our actions and commitments to responsible
banking practices. Nedbank’s credit rating was upgraded
by Fitch in July 2012, while the five largest South African
banks were downgraded in January 2013 following the
downgrade of the South African sovereign-risk rating.
■ For communities – making banking more accessible and
affordable for the entry-level market and rural
communities; identifying numerous non-urban areas for
footprint expansion; increasing staffed outlets and ATMs
by over 48% and 74% respectively since the beginning of
2009. To date Nedbank has donated more than R200
million to charities through its innovative card affinity
programmes, and in 2012 we contributed R116 million to
socio-economic development. Nedbank achieved
Department of Trade and Industry (DTI) code level 2 for
the fourth consecutive year and was ranked first overall
among the top 50 JSE-listed companies in the Financial
Mail/Empowerdex Top Empowered Companies survey.
Furthermore 75.5% of its procurement was sourced locally.
Nedbank’s leadership role in environmental sustainability
was demonstrated by initiatives such as funding a large
percentage of South Africa’s renewable energy
programme and the introduction of Nedbank’s Green
Savings Bond, the value of which has increased to R866
million since its launch. Nedbank maintained its carbon-
neutral status and received the Financial Times 2012
Sustainable Bank of the Year for Africa and the Middle
East award as well as African Business Environmental
Sustainability in Africa 2012 award.
Cluster performance
Nedbank’s business clusters generated an increased RoE of 17.9% (2011: 17.1%) and headline earnings growth of 16.3%,
with all line clusters delivering good performances.
Headline earnings (rm)
roe (%)
Nedbank Capital
Nedbank Corporate2
Nedbank Business Banking
Nedbank Retail
Nedbank Wealth
Operating units
Centre2
total
2012
1,428
1,817
944
2,552
716
7,457
53
7,510
20111
% change
1,228
1,571
866
2,091
654
6,410
(226)
6,184
16.3%
15.7%
9.0%
22.0%
9.5%
16.3%
2012
25.4%
22.5%
21.5%
12.1%
29.6%
17.9%
20111
22.6%
24.5%
21.3%
10.8%
27.7%
17.1%
21.4%
14.8%
13.6%
1 Restated for enhancements to capital allocation methodologies implemented in 2012.
2 2011 restated for transfer of the Rest of Africa Division from Nedbank Corporate to the centre.
Strong earnings growth of 16.3% and the 25.4% RoE in
Nedbank Capital were driven by good asset growth and
pipeline conversion in investment banking, together with
strong performance from global markets that resulted
in materially increased structuring and trading income.
The cluster’s CLR improved, although remaining above
its through-the-cycle range.
Nedbank Corporate performed well, producing good
earnings growth of 15.7% and an RoE of 22.5%, underpinned
by increased cash and electronic banking volumes, a strong
delivery from the listed-property investment portfolio and
favourable deposit growth. This performance was achieved
within a well-managed impairment and expense environment
across the businesses.
Nedbank Business Banking achieved headline earnings
growth of 9.0% to R944 million through maintaining quality
client relationships and outstanding risk management
practices, as reflected in the CLR of 0.34% (2011: 0.53%).
Good underlying momentum was noted in asset payouts,
deposits and new client gains, notwithstanding the protracted
challenges facing the small- and medium-enterprise (SME)
sector in South Africa, which resulted in EP for the year of
R368 million and a sustained high RoE of 21.5%.
48
Old Mutual plcAnnual Report and Accounts 2012
Nedbank Retail’s momentum is reflected in the 22.0%
headline earnings growth and RoE improvement to 12.1%,
narrowing the gap in relation to the cost of equity. This is
testimony to the excellent progress strategically and
financially in repositioning the cluster. The embedding of
sound risk practices is reflected in the CLR of 2.01% (2011:
1.98%) remaining within the through-the-cycle range, while
continuing to reduce defaulted loans and strengthen balance
sheet impairments. Investment in distribution and distinctive
client value propositions is yielding strong client gains and
related transactional, deposit and lending volumes.
Nedbank Wealth continued to record sound earnings growth
of 9.5% and an excellent RoE of 29.6%, supported by solid
performance in the asset management and insurance
businesses. These results were achieved despite pressure on
impairments, a considerable deterioration in the short-term
insurance claims environment in H2 2012 and the R31.5
million (post-tax) rebranding costs relating to the launch of its
new single high-networth offering, Nedbank Private Wealth.
The centre produced a small profit in 2012 from a loss of
R226 million in 2011, largely as a result of the R200 million
portfolio impairment provision recognised at Nedbank
Group level in the prior year. The Rest of Africa division, now
included in the centre, delivered a strong increase in headline
earnings of 35.2%.
Financial performance
net interest income
Net interest income increased 9.1% to R19,680 million
(2011: R18,034 million) and average interest-earning banking
assets grew 7.5% (2011 growth: 5.1%).
The net interest margin (NIM) increased to 3.53% from the
restated 3.48% level achieved in 2011. The margin expansion
reflects the ongoing benefits of risk-adjusted pricing of new
advances and portfolio-tilt-driven changes in the asset and
deposit mix, partially offset by:
■ The negative endowment effect of lower average interest
rates in 2012
■ The cost of lengthening Nedbank’s funding profile
■ The cost of carrying higher levels of lower-yielding liquid
assets as Nedbank prepared for the implementation of
Basel III liquidity coverage ratios.
impairments
Lower levels of impairments at R5,199 million (2011: R5,331
million) were reported. The CLR improved to 1.05% for the
year (2011: 1.13%), remaining above Nedbank’s through-the-
cycle range of 60 to 100 basis points.
Credit loss ratio analysis
Specific impairments
Portfolio impairments
total credit loss ratio
2012
0.91%
0.14%
1.05%
H2 2012
0.84%
0.16%
1.00%
H1 2012
1.00%
0.11%
1.11%
(%)
2011
1.01%
0.12%
1.13%
Given the levels of overall consumer indebtedness, credit risk
management remained a strong area of focus. The reduction
in specific impairments to 0.91% (2011: 1.01%) was driven by a
17.0% decrease in defaulted advances to R19,273 million
(2011: R23,210 million), while further strengthening the
portfolio impairments charge to 0.14% (2011: 0.12%) mainly on
the performing personal loans, Motor Finance Corporation
and home loans books.
The increased level of portfolio impairments was mainly as a
result of further model conservatism and book growth in
personal loans as well as the lengthening of the emergence
period in the Motor Finance Corporation book. Nedbank
retained the R200 million central portfolio provision set aside
last year for unknown events that may have already occurred
but which will only be evident in the future. The total
impairment coverage ratio increased to 56.4% (2011: 49.5%),
largely due to asset mix changes in Nedbank’s banking book.
Nedbank’s collections processes, enhanced by additional
collections staff and more effective collections processes,
generated a 35.1% increase in bad debt recoveries
amounting to R866 million (2011: R641 million).
Credit loss ratio
Nedbank Capital
Nedbank Corporate
Nedbank Business Banking
Nedbank Retail
Nedbank Wealth
total
2012
1.06%
0.24%
0.34%
2.01%
0.61%
1.05%
H2 2012
H1 2012
0.72%
0.18%
0.28%
2.02%
0.76%
1.00%
1.41%
0.30%
0.41%
2.00%
0.46%
1.11%
(%)
Through-the-
cycle target
ranges
0.10 – 0.55
0.20 – 0.35
0.55 – 0.75
1.50 – 2.20
0.20 – 0.40
0.60 – 1.00
2011
1.23%
0.29%
0.53%
1.98%
0.25%
1.13%
49
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed BanKing
continued
CLRs in the wholesale clusters improved in H2 2012. Nedbank
Retail’s CLR was maintained within its through-the-cycle range
and at levels similar to those in H1 2012, reflecting the effect
of asset mix changes as unsecured lending attracts higher
levels of impairments than secured lending. Nedbank
Wealth’s CLR deteriorated mainly due to the impact of a
subdued property market.
non-interest revenue
The continued investment in the Nedbank franchise
contributed to strong NIR growth of 12.4% to R17,324 million
(2011: R15,412 million), lifting the ratio of NIR to expenses to
84.4% (2011: 81.5%), close to Nedbank’s medium-to-long-
term target of > 85.0%. Nedbank has delivered compound
growth in NIR, excluding fair-value adjustments, of 11.0%
over a four-year period.
Commission and fee income increased by R1.5 billion, rising
by 13.7% to R12,538 million (2011: R11,031 million) on the
back of increased activity in the transactional banking, card,
personal loans, investment banking and advisory activities
of Nedbank.
Insurance income grew strongly, increasing 24.9% to
R1,695 million (2011: R1,357 million) from good insurance
sales and underwriting performance, notwithstanding the
poor weather conditions and fire-related claims in H2 2012.
Favourable market conditions and good performance in the
trading business, notably in fixed-income, delivered excellent
trading income growth of 22.0% to R2,644 million (2011:
R2,168 million). Realisations and dividends received in
Nedbank Corporate property and Nedbank Capital
investment portfolios generated R211 million (2011: R323
million) in private equity income.
Negative fair-value adjustments of R265 million (2011: R60
million loss) were recognised mainly as a result of basis risk
on centrally hedged positions, accounting mismatches in
hedged portfolios, including fixed-rate retail deposits and
personal loans, and credit spread unwind on certain of
Nedbank’s Tier 2 debt.
Following the scheduled termination of the contract with
Swisscard that previously housed the Tando card processing
operations, NIR was negatively impacted as no further
revenue was generated in 2012 (2011: R214 million).
expenses
Nedbank’s strong cost management culture remains a key
differentiator and contributed to a lower level of expense
growth for 2012 in line with guidance.
■ Expenses increased 8.5% to R20,528 million (2011: R18,919
million), consisting of 4.1% for business-as-usual activities,
2.1% for investing in growth initiatives and 2.3% for
variable compensation.
Growth in expenses was primarily from:
■ Staff-related expenses increasing 11.2% and comprising:
— remuneration and other staff cost growth of 8.5%,
following inflation-related annual increases averaging
6.5% and 0.9% headcount growth
— short-term incentive costs increasing 18.7% driven by
21.4% headline earnings and 63.5% EP growth
50
— long-term incentive costs increasing by 71.4% as 2011
contained a higher reversal of costs when corporate
performance targets were not met and related incentive
awards lapsed.
■ Volume-driven costs, such as fees and computer processing
costs, continuing to grow in support of revenue-generating
business activities.
■ Investing for growth initiatives, including footprint roll-out,
headcount growth in frontline and collections staff, new
innovative offerings and enhancements in product and
system functionality.
The efficiency ratio improved to 55.5% (2011: 56.6%),
absorbing the negative impact of the interest rate cut in July
on endowment and consequently NII growth.
Since 2007 Nedbank’s five-year compound NIR growth
of 10.6% exceeded the related compound expense growth
of 8.8%.
taxation
The tax charge increased 30.9% to R2,871 million (2011:
R2,194 million), with the effective tax rate increasing to 26.8%
(2011: 25.2%). The increase resulted mainly from lower levels
of dividend income received and an increase in capital gains
tax (CGT) rate from 14.0% to 18.65%.
Statement of financial position
Capital
Nedbank’s capital ratios strengthened during the year,
positioning the organisation favourably for the adoption of
Basel III, which was successfully implemented on 1 January
2013. All capital adequacy ratios remained well above the
Basel II.5 minimum regulatory capital requirements and
Nedbank’s new Basel III internal target ranges. Nedbank’s
strong capital position enabled the redemption of a further
R1.8 billion Tier 2 subordinated debt during 2012 in line with
our capital management planning and positioning for
Basel III.
In August 2012 Nedbank obtained approval from the South
African Reserve Bank (SARB) to manage the Motor Finance
Corporation book on its Advanced Internal Ratings-based
Credit Approach. The resultant reduction in risk-weighted
assets, along with good earnings growth, contributed to
further strengthening of the Basel II.5 common equity Tier 1
ratio to 11.4%.
Nedbank reset its internal targets in line with the new South
African Basel III regulations based on the increased minimum
regulatory requirements for common equity Tier 1 in 2019,
and Tier 1 and total ratios in 2015.
The new internal targets include a conservative management
buffer and allowance for potential Pillar 2B bank-specific
add-ons while taking cognisance of anticipated Basel III
capital levels in other jurisdictions, the view of rating agencies
and Nedbank’s Internal Capital Adequacy Assessment
Process. The Basel III regulatory minimums include minimum
regulatory requirements for common equity Tier 1 in 2019,
Tier 1 and total ratios in 2015 as well as a conservative
Pillar 2B add-on, but exclude any counter-cyclical capital
buffer requirements.
Old Mutual plcAnnual Report and Accounts 2012 Common equity Tier 1 ratio
Tier 1 ratio
total capital ratio
(Ratios calculated include unappropriated profits.)
2012 ratio
(Pro-forma
Basel III)
11.6%
13.1%
15.1%
2012 ratio
(Basel ii.5)
2011 ratio
(Basel II.5)
Internal
target range
(Basel III)
11.4%
12.9%
14.9%
10.5% 10.5%-12.5%
12.0% 11.5%-13.0%
14.6% 14.0%-15.0%
(%)
Regulatory
minimum
(Basel III)
9.00%
11.25%
13.50%
Nedbank’s ratios are anticipated to continue improving in
2013, driven by projected earnings growth and the portfolio
tilt strategy.
liquidity buffer and the notional ability to access the CLF,
Nedbank would be compliant with the Basel III LCR on a
pro-forma basis at 31 December 2012.
Capital allocation to businesses
As reported during Nedbank’s 2012 interim results, economic
capital allocated to the business clusters was revised from
10.0% to 11.0% to align the businesses with the higher
operating capital levels held by Nedbank under Basel III and
the allocation of capital impaired against certain intangible
assets, previously held at the centre. The upward revision of
capital allocated to the clusters resulted in a dilution of the
clusters’ RoE performance, given higher capital levels.
Headline earnings and RoE numbers for the business
clusters for 2011 were restated on a like-for-like basis.
These enhancements had no impact on Nedbank’s overall
headline earnings, capital levels and RoE.
Funding and liquidity
Nedbank remains well funded with a strong liquidity position
and a lengthened funding profile, with the fourth-quarter
average long-term funding ratio increasing further to 26.0%
(2011: 25.0%).
In addition to launching a number of competitive and
innovative savings and investment products for the retail
market, the following funding strategies were implemented
during the year:
■ Issuing of R3.2 billion of senior unsecured debt with
a tenure ranging from three to seven years
■ Issuing of R1.8 billion through the Greenhouse securitisation
programme with tenure of up to five years
■ Maintaining a significant surplus liquidity buffer in excess
of R24.0 billion
■ Improving Nedbank’s sources of quick liquidity to
R107.5 billion (2011: R103.6 billion).
In May the SARB announced that banks would be able to
include cash reserves in the calculation of the liquidity
coverage ratio (LCR), and the SARB would make available a
committed liquidity facility (CLF) of up to 40% of the LCR
requirements. Taking into account Nedbank’s cash reserves,
the liquid assets held for regulatory purposes, the surplus
This was further supported by amendments to the LCR by the
Basel Committee on Banking Supervision (BCBS) on 6
January 2013, which are likely to be adopted by the South
African regulator. These amendments are positive in that they:
■ Allow for a longer lead time to implement the LCR, starting
from 60% (previously 100%) in January 2015 and
increasing to 100% in January 2019
■ Result in a broader definition of qualifying high-quality
liquid assets (HQLA)
■ Reduce HQLA requirements given refinements to various
cash outflow assumptions in the LCR formula.
The revisions to the LCR will be beneficial for banks, with
associated cost savings and more time to implement the LCR.
Having finalised the LCR, the BCBS is now expected to focus
on the net stable funding ratio (NSFR). The impact of NSFR
compliance by South Africa and most banking industries
worldwide would be punitive if implemented as currently set
out in the draft requirements, significantly impacting both
global and domestic economic growth and job creation.
Structural constraints within South African financial markets
will add further challenges to domestic compliance with the
NSFR. The SARB and National Treasury, in conjunction with
the financial services industry, are engaging proactively
during the observation period prior to implementation in
order to address any unintended consequences for South
Africa. It is anticipated, based on extensive global discussion
and the experiences gained from the LCR implementation
process, that a fundamental revision and a pragmatic
approach will be applied to the NSFR well in advance of its
proposed implementation in 2018.
51
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed BanKing
continued
Loans and advances
Loans and advances grew 5.6% to R527 billion (2011: R499 billion), with strong growth in trading advances of 49.2%. Excluding trading
advances, banking advances growth of 3.8% was largely underpinned by advances growth in Nedbank Capital and Nedbank Retail.
Loans and advances by cluster at year-end are as follows:
Banking activity
Trading activity
Nedbank Capital
Nedbank Corporate
Nedbank Business Banking
Nedbank Retail
Nedbank Wealth
Other
total
Nedbank Capital’s banking advances growth was driven by
the successful conversion of its robust investment banking
pipeline and increased trading advances as the interbank
funding desk experienced significantly better market
conditions than in the year before. Nedbank Corporate
recorded favourable growth in term loans and commercial
mortgages of 8.4% and 5.3% respectively, while reducing the
levels of lower-yielding overnight loans. Continuing pressure
in the SME environment saw Nedbank Business Banking’s
clients defer expansion plans, deleverage further and
transact less, which – together with judicious risk
management – kept advances growth to 2.1%. Retail’s
advances growth came from strong gains in cards of 16.1%
(2011: 9.2%) and in the Motor Finance Corporation book of
10.3% (2011: 9.7%), while tightening criteria resulted in
personal loans growing at a reduced rate of 28.7% (2011:
36.5%). Low consumer demand for home loans in conjunction
with selective advances growth and the roll-off of the
back-book led to a 5.5% reduction in the retail home loans
book, with origination through its own client relationships and
channels being emphasised.
Deposits
Deposits grew by a healthy 5.1% to R551 billion (2011: R524
billion), maintaining a strong loan-to-deposit ratio of 95.7%
(2011: 95.2%).
The lengthening of the funding profile was primarily due to
ongoing growth in call and term deposits of 9.9% and fixed
deposits of 8.2% as a result of a strong uptake in the Retail
Savings Bond of R3.3 billion and wholesale deposit offerings
such as Corporate Saver. Cash management deposits grew
7.5%, boosted by net primary banking client gains, whereas
the more volatile negotiable certificate of deposit (NCD)
category decreased 21.4%.
Current and savings accounts grew well, increasing 7.9%
and 9.3% respectively, underpinned by Nedbank’s strong
franchise. Altogether, these improvements in the funding
profile ensured that Nedbank continued to hold a higher
proportion of household deposits relative to the size of our
retail bank.
However, strong competition for deposits in 2012 resulted in
some loss of overall market share in household deposits. The
launch of innovative new deposit products such as Nedbank
Money Trader, increasing functionality on our world-class
internet and mobile banking applications, and various other
52
2012
52,732
29,762
82,494
162,730
60,115
190,647
19,864
11,316
527,166
2011
48,558
19,952
68,510
157,271
58,856
183,748
19,624
11,014
499,023
rm
% change
(annualised)
8.6%
49.2%
20.4%
3.5%
2.1%
3.7%
1.2%
2.7%
5.6%
initiatives will contribute to growing the transactional client
base and positioning Nedbank strongly for sustainable
growth in savings and investment deposits.
Case study
Nedbank green money
At Nedbank we have a number of products and solutions to help grow
the green economy. We are one of the leading investors in infrastructure
projects in South Africa’s financial market, particularly in financing
renewable energy projects. We provide a range of funds focused on
environmental and social benefits that our customers can invest in, such
as our BGreen Exchange-Traded Fund (ETF), and the Nedbank Green
Savings Bond; and we recently launched the Nedbank Capital Sustainable
Business Awards to recognise the contributions of companies and
individual leadership towards sustainable business practices in Africa.
For more information on the Group’s Responsible Business
activities see pages 10-11.
Strategic focus
Nedbank’s strategy is outward-looking, with a focus on
growing the franchise and delivering on its key strategic
initiatives of repositioning Nedbank Retail, growing NIR,
implementing the portfolio tilt strategy and expanding into
the rest of Africa.
■ Nedbank Retail is allocated 39.1% of Nedbank’s capital
and its strategic repositioning will contribute significantly to
ongoing improvements in Nedbank’s performance. While
endeavouring to leverage early turnaround gains to
achieve an RoE at or above the cost of equity (CoE) of 13%
by the end of 2013, a year ahead of the original 2014
target, the deteriorating credit health of consumers noted
in the last quarter of 2012 could make this challenging to
deliver. Continued excellent progress was made in
positioning Nedbank Retail as a more client-centred and
integrated business while maintaining growth momentum
in the underlying businesses, growing the number and
quality of clients, embedding effective risk management
practices and strengthening balance sheet impairments.
■ Nedbank’s NIR-to-expenses ratio target of > 85% is a key
focus area as we continue to deliver good-quality annuity
income through commission and fee growth from
Old Mutual plcAnnual Report and Accounts 2012 primary-client gains, volume growth, new innovative
products and cross-sell. In our technology division we
enabled greater efficiencies, including the rationalisation
of 20 banking systems and the reduction of our servers
from 3,500 to 1,139 since 2009.
■ The portfolio tilt strategy continued to gain traction,
supporting EP growth from R57 million in 2009 to R1,511
million in 2012. Excellent growth in 2012 in commission and
fee income of 13.7%, insurance income of 24.9%, assets
under management of 34.1% and deposits of 5.1%, while
emphasising profitable secured lending, demonstrates the
benefit of focusing on these strategically important EP-rich,
lower-capital and liquidity-consuming activities.
■ In the short to medium term Nedbank’s primary focus on
South Africa and the Southern African Development
Community (SADC) area continues to benefit Nedbank as
this region has the largest EP pool for financial services in
sub-Saharan Africa. The rights to acquire a shareholding
of up to 20% in ETI in less than two years creates a path to
provide a significant benefit to Nedbank’s clients in the rest
of Africa and the opportunity for shareholders to gain
access to the higher economic growth in the rest of Africa
in a prudent yet substantive manner.
Economic outlook
Despite a more promising start to many financial markets in
2013 there appears to be downside risk in most developed
and many emerging market economies and forward visibility
is limited.
South Africa’s GDP is forecast to grow by 2.6% in 2013.
Interest rates are likely to remain lower for longer and are
expected to be unchanged through most of 2013.
Consumer indebtedness is anticipated to ease gradually, but
remains high compared with historical levels, particularly with
39-year-low interest rates. This, combined with the lack of job
security, is expected to limit the growth in demand for housing
and other secured loans. Growth rates in unsecured lending
are expected to continue to moderate.
Uncertainty is likely to continue to affect the level of business
confidence and contain capital expenditure and growth in
wholesale assets in the private sector. Government and public
corporations are forecast to escalate their infrastructure
spending, which should contribute to improved wholesale
advances growth.
Prospects
In the context of the anticipated economic environment and
continued low interest rates in South Africa, Nedbank’s
guidance for 2013 is as follows:
■ Advances to grow at mid to upper single digits
■ NIM to remain at levels similar to those in 2012
■ The CLR to continue improving into the upper end of
Nedbank’s through-the-cycle target range
■ NIR (excluding fair-value adjustments) to grow at low
double digits, and allow Nedbank to meet the medium to
long-term NIR-to-expenses target of > 85%
■ Expenses to increase by mid to upper single digits.
Nedbank’s medium-to-long-term targets remain unchanged,
with the exception of revised targets relating to capital
adequacy and dividend cover following finalisation of the
SARB’s revised guidelines on Basel III capital levels and the
new dividend tax regime in South Africa announced during
the year.
metric
2012 performance
medium to long-term targets
2013 outlook
RoE (excluding goodwill)
Growth in diluted headline earnings per share
Credit loss ratio
NIR-to-expenses ratio
Efficiency ratio
Common equity Tier 1 capital adequacy ratio
(Basel III)
16.4%
19.0%
1.05%
84.4%
55.5%
11.6%
5% above cost of ordinary
shareholders’ equity
≥ consumer price index + GDP growth
+ 5%
Between 0.6% and 1.0% of average
banking advances
> 85%
< 50.0%
10.5% to 12.5%
Improving, remaining below target
Meet target
Improving into upper end of target
Improving to meet the target
Improving, remaining above target
Strengthening, remaining around
mid-point of new target
Economic capital
Dividend cover
Internal Capital Adequacy Assessment Process (ICAAP): A debt rating (including 10% capital buffer)
2.19 times
1.75 to 2.25 times
1.75 to 2.25 times
53
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed sHort-term
insUranCe
Mutual & Federal (M&F) is our short-term
insurer in South Africa, with operations
in Namibia, Botswana and Zimbabwe.
Underwriting result
(£m)
2012
2011
Underwriting margin
(%)
2012
2011
Return on Equity (RoE)
(%)
2012
2011
Gross premiums
(£m)
2012
2011
(10)
30
(1.7)
5.0
7.1
14.9
746
761
Key financial highlights
adjusted operating profit (pre-tax
and pre-nCi)
£43m
2011: £89m
Combined ratio
101.7%
2011: 95.0%
number of employees
2,371
2011: 2,390
Overview
M&F provides a full range of short-term insurance products
to commercial and domestic customers in five principal
portfolios: Commercial, Corporate, Personal, Risk Finance
and Credit.
Strategy
Our strategy is to deliver strong underwriting profit and
premium growth by building a profitable multi-channel
business through which we can deliver competitive customer
value propositions. Our vision is to become the short-term
insurer of choice.
Over the coming years we will continue focusing on
delivering operational efficiencies and driving growth
through the core broker business as well as alternative
channels including direct through iWyze, underwriting
management agencies and niche businesses.
54
Old Mutual plcAnnual Report and Accounts 2012 Our strategy in action:
Going forward:
1. improve the customer proposition and experience
1. improve the customer proposition and experience
Reduced personal lines quote time through improved question flow
and auto-population of data.
Implemented a dedicated complaints management capability.
Upgraded Allsure with new cover inclusions, cover restrictions and
wording simplification.
Deployed a commercial quotation tool.
Continued to sign up new business in affinities, UMA and direct
channels, in addition to our traditional broker channel.
2. Deliver high performance
Designed and implemented consistent commercial underwriting
processes in the branch network.
Embedded a risk-based capital approach to pricing and
capital reserving, in compliance with upcoming South African
solvency regulation.
3. share skills and experience across the group
Continued premium growth through iWyze, M&F’s direct insurance
joint venture with the Emerging Markets Mass Foundation
distribution team.
Concluded operational mechanism for partnering the Emerging
Markets business in Africa.
4. Build a culture of excellence
Introduced a platform for staff to submit innovative ideas and earn
rewards for the best ideas.
Refreshed the M&F brand in South Africa.
5. simplify our structure
Reduced the number of levels in the organisational structure,
allowing for more efficient communication.
Focus on expansion into niche markets and new territories.
Develop iWyze proposition including improved digital capability
and expanded product range.
2. Deliver high performance
Achieve disciplined, profitable growth with greater emphasis on
niche business and reinsurance.
Further reduce management expenses through increased
efficiencies.
Reduce average claims costs through a supply chain management
strategy that enables us to direct our claims expenditure and build
long-term strategic partnerships.
3. share skills and experience across the group
Work with Emerging Markets in Nigeria following proposed
acquisition of Nigerian property and casualty business.
Continue to partner Old Mutual Emerging Markets in the rest
of Africa to identify opportunities and exploit synergies.
4. Build a culture of excellence
Continue embedding a culture that supports outstanding
performance.
Continue to focus on developing and retaining talent.
5. simplify our structure
Consolidate all property and casualty businesses across the Group
into a single reporting structure.
55
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed sHort-term
insUranCe continued
Business profile
Commercial (41.4% of
gross Written Premiums (gWP)
Our largest portfolio, with a broad spectrum of customers ranging from small to medium businesses.
It covers primarily property, liability, motor, engineering, marine and crop insurance risks.
Corporate (10.1% of gWP)
Personal (31.4% of gWP)
Focused on corporate clients from mid-size companies to large multinationals. Offerings include
protection, fire policies, accident policies and motor fleet insurance. The portfolio is serviced by
specialists who support the major brokers in this sphere with expertise in mining, engineering,
chemical production, motor manufacture and other major sectors.
Provides household, motor and all-risk short-term insurance to domestic customers and various
financial groups. Our comprehensive personalised branded product, Allsure, continues to enjoy
significant broker support. The portfolio also offers various white-labelled intermediary-branded
products. It includes iWyze, the direct channel valuables insurance product, as well as a hospital cash
plan, personal accident policies and low-cost products covering livestock and informal dwellings.
risk Finance (9.1% of gWP)
Alternative risk transfer products provided by a well-regarded team, primarily to medium-sized
commercial customers.
Credit (8.0% of gWP)
Underwritten by an M&F subsidiary with a market-leading position in credit insurance.
Highlights
Growth continued with exceptional claims and start-up losses in iWyze impacting the underwriting result
Underwriting margin
Underwriting result
Long-term investment return (LTIR)
AOP (IFRS basis, pre-tax)1
Gross written premiums
Net earned premiums
Claims ratio
Combined ratio
International solvency ratio
Return on equity
2012
(1.7)%
(132)
608
555
9,706
7,573
72.4%
101.7%
64.0%
7.1%
rm
2011
% change
(137)%
(3)%
(47)%
9%
8%
5.0%
354
625
1,039
8,865
7,039
65.2%
95.0%
66.4%
14.9%
1
2012 and 2011 included 50% of the losses incurred by iWyze, M&F’s direct insurance joint venture with Emerging Markets. The remaining 50% was recognised in Emerging Markets.
Review of results
Despite strong growth in the number of policies written,
particularly in new direct markets and niche business, AOP
was down 47%. This decrease was due primarily to a lower
underwriting result, following severe weather losses and
a marked deterioration in commercial fire claims. LTIR
decreased by 3% due to the lower LTIR rate applied in 2012.
iWyze, our direct insurance joint venture with the Mass
Foundation distribution team, continued to grow premiums,
with policy count growth of 33% during the period. While
still in a start-up phase, we are on track to deliver
underwriting profitability.
The company remains well capitalised, with a 64%
international solvency ratio (the ratio of net assets to net
premiums) at 31 December 2012. M&F is at an advanced
stage in its preparation for Solvency II and its South African
equivalent, Solvency Assessment and Management (SAM),
and continues to explore mechanisms to structure its balance
sheet efficiently.
Underwriting and IFRS AOP results
The underwriting margin of (1.7)% (2011: 5.0%) was impacted
by a significant market-wide increase in claims, investment in
new business and lower premium rates, but benefited from
well-contained claims servicing costs. Credit Guarantee
performed well and the businesses in Namibia and Botswana
continued to deliver satisfactory contributions. Start-up losses
in iWyze increased to R161 million (2011: R119 million) and
continued to have a significant impact on the overall
underwriting result.
Gross written premiums increased by 9%, supported by good
unit growth partially offset by softening rates. We increased
our focus on achieving premium growth through alternative
distribution channels, including direct through iWyze,
underwriting management agencies and niche business.
The claims ratio increased from 65.2% in 2011 to 72.4%.
We experienced a significant increase in large claims in our
Commercial lines business and a higher number of claims in
our Personal lines business, due primarily to adverse weather
conditions. Some R204 million of hailstorm and flood claims
from storms in Q4 2012 accounted for 2.7% of the claims
ratio in 2012.
56
Old Mutual plcAnnual Report and Accounts 2012 Process efficiencies identified in our change programme
enabled us to reduce expenses by 5.5%, with an absolute
fall of £5 million. The expense ratio improved from 15.7% to
13.8% as we continued to grow the business without increasing
the cost base. But the reduced underwriting result decreased
the RoE from 14.9% to 7.1%.
Management actions during the year
We are in the process of acquiring Oceanic’s Nigerian
general insurance business from Ecobank, subject to
regulatory approval, for around R170 million (US$20 million).
The transaction is expected to be completed in Q2 2013.
We successfully contained operating costs and implemented
selective pricing action on poorly performing lines of business.
This will continue in the 2013 renewal season and beyond.
We continued to partner Old Mutual Emerging Markets in the
rest of Africa to identify opportunities and exploit synergies.
Outlook for 2013
The significant number of catastrophe claims in late 2012 –
and the continued high incidence of large claims in early 2013
– supports a likely hardening of rates in 2013. In addition,
improved management information will allow us to
implement selective price strengthening. We will continue to
focus on disciplined, profitable premium growth, particularly
through increased contributions from alternative channels.
And we will improve underwriting performance through
continued cost containment and a more efficient supply chain
management strategy to reduce average claims costs.
Our operational activities and targets include:
■ Keeping the expense ratio below 14% and increasing
operational efficiency
■ Implementing selective rate increases
■ Increasing innovation, particularly in the area of
digital connectivity
■ Further developing pricing differentiation between
iWyze customers
■ Helping the broker community to manage the impact of
tightened regulation on the remuneration for their services
to customers
■ Improving service levels to support further growth in
policy count.
Going forward we will report all of the Group’s Property and
Casualty activities as a single segment, including 100% of the
iWyze result.
Case study
Building financial knowledge
in our future customer base
Old Mutual, Nedbank, Mutual & Federal all work together with Women
Investment Portfolio Holdings (WIPHOLD) to create a full range of
financial services and stimulate business development in the poorest
and remotest regions of South Africa through an initiative called
‘Imbizo’. Initially community and business support is provided through the
Old Mutual and Nedbank Foundations, alongside business mentoring
and coaching, free Old Mutual financial education and financial
wellbeing workshops, developmental funding through Masisizane and
unique financing vehicles such as the Nedbank Zakheleni loans. This
develops business knowledge and capability so that businesses are in
a position to take advantage of our range of financial services available
to small businesses.
For more information on the Group’s Responsible Business
activities see pages 10-11.
57
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we have performed Us
asset management
Trading as Old Mutual Asset Management (OMAM)
and based in Boston, US Asset Management
(USAM) is an international asset management
business. Through its multi-boutique framework it
delivers institutionally driven, active investment
management to clients around the world.
Key financial highlights
results from Continuing operations1
£95m
2011: £85m
Adjusted operating profit (pre-tax)
(£m)
2012
2011
91
67
Operating margin (before NCI)
(%)
2012
2011
26
18
operating margin (before nCi):
results from Continuing operations1
Funds under management:
Results from Continuing Operations1
(£bn)
Net client cash flow:
Results from Continuing Operations1
(£bn)
2012
2011
128.4
117.8
2012
2011
0.9
(2.9)
29%
2011: 27%
number of employees
1,225
2011: 1,564
Strategy
Our strategy is to achieve continued growth in our core nine
affiliates by developing their investment capabilities to react
to changing institutional requirements. We will accelerate
this process through selected centre-led initiatives. Future
investments in the affiliates in seed capital provision and global
distribution will be combined with ongoing cost control at the
centre and monitored against our required return criteria.
Overview
USAM’s nine boutique firms (affiliates) offer a diverse range
of investment strategies and products to a wide range of
institutional investors around the globe.
We support our affiliates from the centre by providing them
with strategic capabilities, promoting offshore expansion
through our global distribution capabilities and helping them
to deliver superior investment performance, innovative
offerings and focused service to clients.
In 2012 we took steps to align our affiliate portfolio with our
strategic growth plan by divesting affiliates which did not fit
with our focus on long-term, institutionally driven, active
investment management. We therefore continue to present
our results on two bases: ‘reported results’ and ‘results from
continuing operations’. Results from continuing operations
exclude the operating results of the divested affiliates and
certain restructuring costs, to represent the earnings of the
business as it is now constituted1.
1 Continuing operations excluded the results of 2100 Xenon, Larch Lane,
300 North, Analytic, Ashfield Dwight, and Old Mutual Capital, which were
disposed during 2012, and Lincluden, which was disposed during 2011.
Continuing operations also excluded OMAM(UK), which was transferred
to the Old Mutual Wealth operation of LTS in 2012. Reported results include
OMAM(UK) in 2011 and Q1 2012.
58
Old Mutual plcAnnual Report and Accounts 2012 Our strategy in action:
Going forward:
1. improve the customer proposition and experience
1. improve the customer proposition and experience
Strong investment performance in key products with 62%, 66% and
76% of assets beating benchmark over one, three and five years
Progressed global distribution strategy, completing the process of
filling key roles and identifying focus areas
2. Deliver high performance
AOP grew 41% from $107 million on reported basis in 2011 to $151
million on continuing operations basis.
Operating margin, before non-controlling interests, of 29%
achieved on continuing operations basis.
Positive NCCF of $1.4 billion on continuing basis.
3. share skill and experience across the group
$1.8 billion of Group mandates sourced by USAM in 20121.
Co-ordination with multiple Group companies to support
affiliate growth.
4. Build a culture of excellence
Continued improvement in culture metrics.
5. simplify our structure
Divestitures completed for 2100 Xenon, Larch Lane, 300 North,
Analytic, Ashfield, Lincluden, Dwight and Old Mutual Capital
OMAM(UK) transferred to Old Mutual Wealth.
Over $100 million of seed capital returned from sale of affiliates.
Enhance partnership with existing affiliates.
Assess affiliate portfolio to fill critical product and asset class gaps.
Successfully execute global distribution strategy.
2. Deliver high performance
Manage business to achieve agreed financial targets.
Drive sustained positive NCCF.
3. share skill and experience across the group
Increase level of Group mandates managed by USAM.
Leverage Group distribution channels.
4. Build a culture of excellence
Drive equity culture.
Focus on achieving desired cultural attributes.
5. simplify our structure
Continue to align centre activities with strategy.
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r
f
o
r
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d
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o
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Including $0.3 billion in relation to affiliates disposed during 2012, and $0.8 billion
in relation to OMAM(UK).
59
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
Us
asset management continued
Usam boutique investment managers (continuing operations)
affiliate
established
investment style
Barrow Hanley
Acadian
Rogge
Heitman
Campbell
TS&W
ICM
Copper Rock
Echo Point
1979
1986
1981
1966
1981
1969
1972
2005
2010
Fundamental US global and international value equity and US fixed income manager
Quantitative US, global and international equity manager
Fundamental global fixed income manager
Public and private real estate, real estate debt manager
Timber investment management company
Fundamental US/international value equity and fixed income manager
Fundamental US value equity manager
Fundamental US small/SMID growth and global equity manager
Fundamental international growth equity manager
Funds under
management
31 December
2012
$67.7bn
$51.9bn
$50.2bn
$20.5bn
$6.6bn
$6.2bn
$2.1bn
$1.8bn
$1.7bn
Highlights
AOP up 35% through strategic repositioning of affiliate portfolio, strong market returns, and a return to positive NCCF in our continuing
operations
reported results1
AOP (IFRS basis, pre-tax)
Operating margin, before non-controlling interests
Operating margin, after non-controlling interests
Net client cash flow ($bn)
Funds under management ($bn)
results from continuing operations1
AOP (IFRS basis, pre-tax)
Operating margin, before non-controlling interests
Operating margin, after non-controlling interests
Net client cash flow ($bn)
Funds under management ($bn)
2012
144
26%
21%
(0.4)
2011
107
18%
15%
(24.6)
$m
% change
35%
98%
31-Dec-12
31-Dec-11
% change
208.6
231.5
(10)%
2012
151
29%
24%
1.4
2011
137
27%
24%
(4.7)
$m
% change
10%
130%
31-Dec-12
31-Dec-11
% change
208.6
183.3
14%
1 Continuing operations excluded the results of 2100 Xenon, Larch Lane, 300 North, Analytic, Ashfield Dwight, and Old Mutual Capital, which were disposed during 2012, and
Lincluden, which was disposed during 2011. Continuing operations also excluded OMAM(UK), which was transferred to the Old Mutual Wealth operation of LTS in 2012. Reported
results include OMAM(UK) in 2011 and Q1 2012.
60
Old Mutual plcAnnual Report and Accounts 2012 Review of 2012 progress (2012 results from
continuing operations compared to 2011
reported results)
IFRS AOP from continuing operations of $151 million was
up 41% on the 2011 reported result, supported by positive
markets. AOP operating margin on continuing operations
(before non-controlling interests) increased 1,100 basis points
to 29% from a reported margin of 18% in 2011.
Benefiting from positive market conditions, continued strong
investment performance and affiliate divestitures, net client
cash inflows from continuing operations improved to
$1.4 billion (2011: $24.6 billion outflow on a reported basis),
turning positive for the first time since the reported flows
of 2007.
IFRS AOP results and operating margin
reported results
IFRS AOP was up 35% to $144 million (2011: $107 million),
driven largely by savings realised through the sale of seven
affiliates and the transfer of OMAM(UK) to Old Mutual
Wealth, in addition to strong market performance.
AOP operating margin before non-controlling interests
improved 800 basis points to 26% (2011: 18%) as a result of
the improvement in IFRS AOP, despite the fall in FUM over
the period.
results from continuing operations
IFRS AOP from continuing operations was up 10% to $151
million (2011: $137 million), due to increases in management
and performance fees and lower deferred acquisition cost
amortisation than the comparative period, partly offset by
additional investment in global distribution.
Management fees increased $15 million or 3% over the
comparative period due to higher average FUM, while
performance and transaction fees were up $24 million
or 126%.
AOP operating margin before non-controlling interests was
up 200 basis points at 29%. We maintain a margin target of
25% to 30% or more, before non-controlling interests.
investment performance for continuing operations
For the one-year period ended 31 December 2012, 62% of
assets outperformed benchmarks (2011: 65%). Over the three
and five-year periods to 31 December 2012, 66% and 76% of
assets outperformed benchmarks (2011: 73% and 69%); the
fall in three-year performance resulted primarily from one
product’s below-benchmark performance.
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Gross inflows
Gross outflows
Total client-driven net flow
Hard asset disposals1
Net client cash flow
Disposals
Transferred to Old Mutual Wealth
Market and other
Closing FUM
Continuing operations
Disposed of or
transferred affiliates
total
2012
183.3
28.7
(25.3)
3.4
(2.0)
1.4
–
–
23.9
2011
188.4
20.9
(24.6)
(3.7)
(1.0)
(4.7)
–
–
(0.4)
208.6
183.3
2012
48.2
3.4
(5.2)
(1.8)
–
(1.8)
(42.0)
(6.6)
2.2
–
2011
69.9
8.5
(28.4)
(19.9)
–
(19.9)
(2.7)
–
0.9
48.2
2012
231.5
32.1
(30.5)
1.6
(2.0)
(0.4)
(42.0)
(6.6)
26.1
208.6
$bn
2011
258.3
29.4
(53.0)
(23.6)
(1.0)
(24.6)
(2.7)
–
0.5
231.5
1 Hard asset disposals constitute forestry, property and similar assets, which were sold and proceeds passed to client beneficiaries.
reported results
FUM ended the period at $208.6 billion (31 December 2011:
$231.5 billion).
The management buy-outs of 2100 Xenon Group, 300 North
Capital, Analytic Investors, Ashfield Capital Partners and
Larch Lane Advisors during Q4 2012 reduced FUM by $11.2
billion, while the disposals of Dwight Asset Management
Company LLC and OMCAP in Q2 2012 reduced FUM by
$30.8 billion. Positive market movements added $26.1 billion,
or 11% of opening FUM.
Net client cash outflows for the period totalled $0.4 billion
(2011: $24.6 billion outflow). Positive cash flows in continuing
firms concentrated in global fixed income and emerging
markets were offset by outflows in US equities. 2011 saw
substantial stable value outflows at Dwight.
results from continuing operations
Year-end FUM increased 14% to $208.6 billion
(2011: $183.3 billion) due to market appreciation
and improved NCCF.
FUM consisted primarily of long-term investment
products diversified across equities ($118 billion, 57%),
fixed income ($63 billion, 30%) and alternative investments
($28 billion, 13%).
Net client cash inflows of $1.4 billion (2011: $4.7 billion
outflow) reflected continued strong affiliate investment
performance and positive market trends for the year in
aggregate. Total client-driven net client cash inflows were
$3.4 billion before investment-driven hard asset disposals
of $2.0 billion in USAM’s real estate and timber managers.
The combination of improved NCCF and an increase in
average basis points on cash flows yielded annualised
revenue of $12.4 million (or an average of 88 basis points)
from NCCF in 2012.
61
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
Us
asset management continued
Gross inflows totalled $28.7 billion (2011: $20.9 billion), with
$11.8 billion of gross inflows relating to new client accounts.
Inflows were led by US and global fixed income products,
in addition to emerging markets, international and global
equities. Gross outflows totalled $27.3 billion (2011: $25.6
billion), led by US and international equities, and global fixed
income products.
During 2012 Barrow, Hanley, Mewhinney & Strauss won
a $1.4 billion mandate to sub-advise the Transamerica
Dividend Focused Fund. $871 million of this funded in
January 2013; the remainder is expected to fund later this
year. In Q4 our timber manager, Campbell Group, won a
$0.7 billion acquisition of forestry assets in South Australia –
a key step in its global expansion.
Non-US clients currently account for 35% of FUM (2011: 33%).
International equity, emerging markets, global equity and
global fixed income products accounted for 52% of year-end
FUM (2011: 50%).
management actions and decisions taken during
the year
We completed the repositioning of our existing affiliate
portfolio in Q4 2012, divesting five affiliates through
management buy-outs: 2100 Xenon Group, 300 North
Capital, Analytic Investors, Ashfield Capital Partners and
Larch Lane Advisors. These transactions, completed at the
end of Q4, followed the Q2 sales of OMCAP and Dwight
Asset Management Company – allowing us to refocus on
investment and distribution efforts for the nine continuing
affiliates. OMAM(UK) was transferred to Old Mutual Wealth
at the start of Q2 2012. We are exploring opportunities to
reallocate the capital returned as a result of these transactions.
In 2012 we announced organisational changes to further
align USAM’s executive structure with its strategic objectives.
Key among these was the appointment of Linda Gibson as
Head of Global Distribution. She will advance our strategy
of building core institutional distribution capabilities in global
markets and channels to support the expansion of our nine
continuing affiliates, including leveraging existing Group
capabilities and relationships. We continued to progress this
strategy in 2012, completing the process of filling key roles
and identifying primary focus areas.
outlook for 2013
In 2013 we expect to maintain our operating margin
within the target range of 25% to 30% or more, before
non-controlling interests. We expect aggregate NCCF to
remain positive, assuming continued strong markets and
affiliate investment performance, and we aim to increase our
penetration of markets outside the US in 2013 and beyond.
We continue actively seeking and evaluating opportunities to
add to the existing investment capabilities in our portfolio of
affiliates, both organically and through fold-in acquisitions.
Case study
Demonstrating best practice
in carbon reporting
Old Mutual has remained on the ‘Carbon Disclosure Leadership Index’
for the past four consecutive years and currently ranks 8th in the Financial
Services Sector for the FTSE350 category. The index represents the largest
source of corporate carbon data on companies world-wide and is used
by investors to assess a company’s professional approach to corporate
governance in respect of climate change disclosure practices. Our
position in the leadership Index is recognition of market leading data
management and the understanding of climate change related issues
affecting the company.
For more information on the Group’s Responsible Business
activities see pages 10-11.
62
Old Mutual plcAnnual Report and Accounts 2012 NON-CORE BUSINESS
BermUDa
Old Mutual Bermuda is a non-core business; its results are
excluded from the Group’s IFRS AOP, although the interest on
inter-company loans from Bermuda to Group Head Office is
charged to AOP.
Management actions
Old Mutual Bermuda continued to implement its run-off
strategy of risk reduction while managing for value.
An option-based hedging strategy implemented in
March 2012 has significantly improved its risk profile by
hedging the impact of any subsequent adverse equity market
movements on the cash top-up payments to policyholders
reaching the fifth anniversary of their Universal Guarantee
Option (UGO) Guaranteed Minimum Accumulation Benefits
(GMAB) contracts.
In addition to the option hedge in place for fifth anniversary
cash top-up payments, we have dynamically hedged foreign
currency exchange exposures and the residual equity market
risk for the risk extending beyond the five-year top-ups at a
level of 50%.
In July 2012, in consultation with the Bermuda Monetary
Authority, the Group recapitalised Old Mutual
Bermuda in anticipation of the expected new Bermudan
solvency requirements.
Key metrics and outcomes
iFrs results
The IFRS post-tax profit for the period was $254 million (2011:
$286 million loss), driven primarily by the reduction in GMAB
reserves and a realised gain on the fixed income portfolio,
partially offset by a full write-off of all remaining deferred
acquisition costs.
mCev results
The 2012 operating MCEV earnings resulted in an after-tax
gain of $157 million (2011: $76 million). The improvement was
due mainly to a combination of positive operating experience
and favourable changes in the surrender and future
operating expense assumptions as a result of higher-than-
expected lapses on the UGO GMAB business.
MCEV earnings including economic variances and other
non-operating variances totalled $342 million (2011: $343
million loss), primarily due to an improvement in capital
markets and realised fixed income portfolio gains.
Total insurance liabilities
Of year-end insurance liabilities totaling $2,764 million
(2011: $4,831 million):
■ $2,119 million (2011: $3,130 million) was held in a
separate account relating to variable annuity investments,
of which $1,856 million related to GMAB policies
(2011: $2,858 million)
■ $229 million (2011: $1,061 million) related to the variable
annuity guarantee reserve on the GMAB policies
■ $416 million (2011: $640 million) related to other
policyholder liabilities. These included deferred and fixed
indexed annuity business as well as variable annuity fixed
credited interest investments.
The vast majority of the variable annuity guarantee reserve
relates to contracts with UGO GMABs. The 2012 year-end
UGO GMAB reserve was $219 million – a decrease of
$816 million over the year, due mainly to improved overall
equity market performance and a high level of UGO GMAB
surrenders during the year.
UGO GMAB reserves and top-up payments
The UGO GMAB reserve relates to the full remaining period
of the relevant policies, including the five-year anniversary
value of 105% of total premiums, on contracts yet to reach that
anniversary; the 10-year 120% top-up of total premiums; and
any contracts with a Highest Anniversary Value (HAV) feature.
Fifth-anniversary payments began on 5 January 2012 and
will continue until 29 August 2013. At the end of 2012, 67% of
the UGO GMAB contracts by guarantee amount had passed
their five-year top-up date.
The total estimated cash cost of meeting these fifth-anniversary
payments to policyholders decreased from $689 million
to $530 million as a result of favourable equity market
movements. Hedge gains and losses have not been taken
into account in the cash cost calculations.
The table below shows the level of guarantee reserves and,
in respect of the UGO GMAB fifth-anniversary guarantees,
the cumulative top-ups paid and the estimated top-up
payments remaining based on equity market levels on the
calculation date.
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Calculation Date
31-Dec-10
31-Dec-11
31-Dec-12
31-Jan-13
1 To meet UGO GMAB fifth anniversary payments.
2 Cash cost before gains on hedge options.
guarantee
reserves for
Ugo gmaB
actual
cumulative
top-up
paid1,2
estimated
remaining
top-up
payment1,2
660
1,035
219
164
–
–
425
443
334
689
105
67
$m
total
estimated
top-up
payment1,2
334
689
530
510
63
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
Highest Anniversary Value
80% of the UGO GMAB book by value at 31 December
2012 included an HAV feature, which gave holders of the
policies concerned a 10-year guarantee value based on the
highest policy value at any anniversary date. At 31 December
2012, 5% of the total UGO GMAB book by value had
a 10-year guarantee above 120%.
Surrender development
Across the whole Bermuda book there were $1,929 million
of surrenders in 2012 (2011: $1,182 million). At 31 December
2012 around 80% of non-Hong Kong UGO policies and
around 60% of Hong Kong policies had been surrendered
on or after their anniversary date.
Of the 16,842 UGO GMAB contracts that reached their
fifth anniversary during 2012, 10,343 were surrendered.
There were 10,765 UGO GMAB contracts that had not
reached their fifth anniversary at 1 January 2013, of these
10,472 will reach their fifth anniversary in H1 2013, with the
remainder reaching this milestone by the end of August 2013.
2,840 non-GMAB policies remained at 31 December 2012,
13% of the total book. Total non-GMAB liabilities decreased
by 26% to $679 million, of which non-GMAB separate
account liabilities relating to variable annuity investments
were $263 million.
Investment portfolio and
treasury management
The realised gain on the fixed income portfolio was
$31 million (2011: $1 million) and the net unrealised position
was a gain of $14 million (2011: $29 million). There were
no investment losses and no impairment or credit defaults in
the period
The portfolio has a current average Moody’s rating of Aa3,
with investment-grade holdings continuing to represent more
than 90% of the portfolio.
Old Mutual Bermuda will continue to sell assets from the fixed
income portfolio and use other liquid assets of the business to
meet its liabilities, which will include the cash requirements of
the remaining top-ups as they fall due.
Collateral posted for the hedge assets will adjust as the
liabilities develop and could be released as the business
evolves. The inter-company loan notes are structured in
tranches allowing capital and treasury management
flexibility, if cash is required from this source.
Capital and surplus
Local entity statutory capital and surplus increased to
$1,105 million at 31 December 2012 (2011: $291 million),
reflecting the July recapitalisation and the improved
profitability for the year. The July recapitalisation related
to the transfer of $571 million of capital to Bermuda from
Group. The capital comprised $250 million of new inter-
company loan notes, $260 million of Group seed investments
and cash of $61 million.
The future level of capital required on both an economic and
a regulatory basis will be influenced by the nature and extent
of the run-off of the Bermuda business book and the amount
of the investment hedge in place. We would expect to review
the regulatory capital requirement with the Bermuda
Monetary Authority in 2013.
Strategy and outlook
Old Mutual Bermuda will continue to implement its run-off
strategy of reducing risk while managing for value, with
liability management and de-risking initiatives designed to
accelerate the run-off in 2013. Consideration is also being
given to the future management of the remaining book of
10-year 120% top-up HAV policies and non-GMAB policies.
the Bermuda business assets backing the liabilities include:
Cash and other liquid assets
Fixed income general account portfolio
Collateral for hedge assets & FV of equity options
Inter-company loan notes
Investment in affiliated subsidiary (Group seed investments)
Separate account assets
Other assets
total assets
31-Dec-12
31-Dec-11
% change
$m
330
195
52
1,032
260
2,119
58
4,046
443
543
91
830
–
3,130
122
5,159
(26)%
(64)%
(43)%
24%
–
(32)%
(52)%
(22)%
64
Old Mutual plcAnnual Report and Accounts 2012 FINANCIAL
REVIEW
Group Financial Highlights
Group highlights1
Adjusted operating profit (IFRS basis, pre-tax)
Adjusted operating earnings per share (IFRS basis)
Group net margin3
Return on equity4
Net asset value per share
LTS gross sales (£bn)
Life assurance sales – APE basis
Non-covered business sales5
Net client cash flow (£bn)
– LTS net client cash flow (£bn)
– USAM net client cash flow (£bn)
Funds under management (£bn)
Total dividend for the year
Total profit after tax attributable to equity holders of the parent
2011
(constant
currency)
1,363
16.1p
43bps
132.4p
20.4
1,152
13,007
(11.7)
3.2
(15.6)
255.6
2012
1,614
17.5p
50bps
13.0%
146.2p
23.3
1,133
14,893
5.0
3.2
(0.2)
262.2
7.0p
1,173
Change
18%
9%
7bps
10%
14%
(2)%
14%
3%
2011
(as reported)
1,515
18.0p2
46bps
14.6%
140.2p
21.5
1,207
13,786
(11.4)
3.2
(15.3)
267.2
5.0p
667
£m
Change
7%
(3)%
4bps
(160)bps
4%
8%
(6)%
8%
(2)%
2.0p
1 The figures in the table are in respect of core continuing businesses only. The comparatives have been restated accordingly.
2 2011 adjusted operating earnings per share has been restated to take account of the 7-for-8 share consolidation that took effect on 23 April 2012.
3 Ratio of AOP before tax to average assets under management in the period.
4 RoE is calculated as core business IFRS AOP (post-tax) divided by average ordinary shareholders’ equity (excluding the perpetual preferred callable securities).
5
Includes unit trust, mutual fund and other non-covered sales.
Adjusted operating profit (AOP)
During the year to 31 December 2012 (‘2012’ or ‘the period’)
Old Mutual showed strong growth in profits compared to
the year to 31 December 2011 (‘2011’) on a constant
currency basis. Pre-tax AOP was £1,614 million, an increase
of £251 million on a constant currency basis, driven by
increased profitability in our long-term savings and banking
businesses in the emerging markets. AOP earnings per
share were up 9% to 17.5p on a constant currency basis.
The weakening in the rand to sterling average exchange rate
reduced sterling earnings; the profit increase on a reported
basis was £99 million.
47% of AOP generated by the business units after tax and
non-controlling interests was paid to the holding company
in cash.
Group net margin
Group net margin (measured as profit before tax on average
FUM and average banking assets at Nedbank) increased
by seven basis points from 43 to 50 basis points on a constant
currency basis. The increase was driven by strong profit
growth in Nedbank, Emerging Markets and USAM. Average
FUM was marginally up. In Emerging Markets, net margin
increased by nine basis points due largely to a 19% growth in
profits. In Old Mutual Wealth the net margin, excluding the
gain from the previously reported smoothing for policyholder
tax in 2011, decreased marginally from 31 basis points to
30 basis points, with a shift towards lower margin platform
business, offset by operational scale in our expense base.
Return on equity
Core Group RoE was 13.0%, against a 2011 RoE of 12.5%
with Nordic included. The 2012 equity base was reduced
as a result of the Special Dividend in June 2012, more than
offsetting the profit on disposal of Nordic. The 2011 reported
Core Group RoE was 14.6%, with Nordic net average equity
of £1.8 billion excluded from the equity base, as a result of its
classification as a discontinued operation.
Long-Term Savings gross sales
Gross sales for Emerging Markets grew 25% to £11.7 billion,
with the sales mix in South Africa continuing to shift from
traditional life products to modern investment products
including unit trusts and mutual funds. Gross sales in
Old Mutual Wealth were £11.6 billion, led by UK Platform
and OMGI inflows. Non-covered business sales in LTS,
including unit trust and mutual fund sales, were up 27%.
Non-covered sales in the second half of 2012 were strong at
£8.3 billion, up 33% on the first half of 2012. Life assurance
annual premium equivalent (APE) sales were down 2% to
£1.1 billion.
Net client cash flow
The Group had strong positive NCCF of £5.0 billion
(2011: £11.7 billion outflow). Excluding the outflows at the
divested affiliate firms at USAM, NCCF was £6.1 billion
(2011: £0.9 billion). Old Mutual Wealth NCCF was £2.0 billion,
the positive inflows reflecting the momentum in our proposition
as we attract new customers and further enhance features
and functionality. This is particularly encouraging as it comes
despite a backdrop of challenging markets, where advisers
have remained focused on ensuring readiness for the
RDR. Emerging Markets NCCF improved from £0.4 billion to
£1.2 billion, despite the Public Investment Corporation outflow
of £1.0 billion (R12.6 billion) from Old Mutual Investment
Group South Africa’s (OMIG(SA)) Electus boutique in July
2012. USAM saw net client cash inflows in its continuing
business, reflecting continued strong investment performance
in a number of key strategies and positive market trends.
65
How we have performedFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
FINANCIAL
REVIEW continued
Funds under management
Reported FUM increased by 3% on a constant currency basis,
with NCCF of £5.0 billion and positive market movements of
£26.9 billion offset by a £27.0 billion reduction in FUM from
the divestment of affiliates at USAM and the disposal of
Old Mutual Wealth’s Finnish business. Excluding the impact
of these divestments, FUM increased by 15%.
Other economic impacts
South African long-term interest rates reduced significantly in
2012, with the 10-year government bond yield used as the
Financial Soundness Valuation (FSV) rate decreasing from
8.2% at end-2011 to 6.9% at end-2012. This economic change
had an unfavourable impact on IFRS AOP for Emerging
Markets and in particular for the Retail businesses.
FUM rose 17% in LTS, with Emerging Markets up 16% and
Old Mutual Wealth up 18%: £4.0 billion of this increase was
due to the inclusion of Old Mutual Asset Managers (UK)
(OMAM(UK)) for the first time in 2012. USAM FUM rose 14%
in its continuing businesses.
Equity markets finished strongly in 2012, with the FTSE 100,
S&P 500, MSCI World and the JSE All Share indices up by 6%,
13%, 13% and 23% respectively over the year.
Impact of foreign exchange
The rand to sterling average exchange rate weakened by
12% during 2012, reducing sterling earnings from our South
African businesses. The US dollar to sterling average rate
strengthened by 1%, increasing sterling earnings from USAM.
The year-end rand closing rate was 10% lower than in 2011.
The US dollar closing rate was also lower, down 4% against
2011. Both foreign exchange closing rate movements reduced
sterling FUM.
AOP analysis
Revenue
Fees
Underwriting2
Nedbank net interest income3
Nedbank non-interest revenue
Net other revenue
Total revenues
Expenses
Finance costs
Administration expenses & other expenses
Acquisition expenses
Total expenses
AOP before tax and non-controlling interests
In order to manage the downside risk of a volatile FSV
interest rate and its consequent impact on IFRS profits,
Emerging Markets put a hedge programme in place in the
second half of 2012. This partially hedged the risk and helped
to reduce the negative impact from a further decline in the
FSV rate in the latter part of the year. The hedge programme
has been rolled forward into 2013.
2012
2,086
1,425
1,145
1,298
404
6,358
(130)
(3,592)
(1,022)
(4,744)
1,614
2011
(constant
currency)1
2,036
1,322
1,002
1,135
365
5,860
(128)
(3,388)
(981)
(4,497)
1,363
£m
% change
2011
(as reported)1
% change
2%
8%
14%
14%
11%
8%
(2)%
(6)%
(4)%
(5)%
18%
2,075
1,471
1,120
1,268
402
6,336
(128)
(3,676)
(1,017)
(4,821)
1,515
1%
(3)%
2%
2%
–
–
(2)%
2%
–
2%
7%
1 The comparative period has been restated to reflect Nordic as discontinued.
2 Underwriting includes net income from writing insurance products (protection, annuity and general insurance).
3 Presented net of impairments.
Sources of earnings are analysed on a constant currency
basis below:
Fees increased by 2% to £2,086 million. The increase was
driven by Emerging Markets and Old Mutual Wealth,
reflecting higher average FUM. This was partly offset by
a decrease in USAM due to the disposals of affiliates. Fees
include asset-based fees, transactional fees, performance
fees and premium-based fees, earned on unit-linked
investment contracts and asset management revenues.
Underwriting increased 8% to £1,425 million. The increase
was mainly driven by higher mortality profits in Emerging
Markets and lower claims costs within Old Mutual Wealth.
Mutual & Federal’s underwriting results were impacted by
higher claims experience during the period.
Nedbank net interest income (NII) was up 14% to £1,145 million,
net of impairments, due to an increase in the net interest
margin, an increase in interest-earning assets and a reduction
in impairment provisions.
Nedbank non-interest revenue (NIR) was up 14% to
£1,298 million. NIR includes service charges, trading income,
commission and transactional fees. The increase was due to
higher trading income, higher commission and fees, higher
transactional volumes and increased insurance revenues.
Net other revenue was up 11% to £404 million, driven by an
increase in long-term investment return (LTIR) in Emerging
Markets and on excess assets. LTIR on excess assets
increased by 64% to £54 million (2011: £33 million),
66
Old Mutual plcAnnual Report and Accounts 2012
primarily due to an increase in average excess assets held
in South Africa pending payment of the Special Dividend
to South African shareholders.
The LTIR rates are reviewed annually and reflect the returns
expected on the chosen asset classes. The 2012 long-term rates
for Emerging Markets, Mutual & Federal and Old Mutual
Wealth were 9.0% (2011: 9.0%), 8.6% (2011: 9.0%) and
1.5% (2011: 2.0%) respectively. The 2013 long-term rates for
Emerging Markets, Mutual & Federal and Old Mutual Wealth
are 8.0%, 7.4% and 1.0% respectively. The asset allocation in
South Africa will continue to be split 75% cash and bonds and
25% equity.
In 2012 the Group’s AOP finance costs increased marginally
as a result of the higher coupon on the £500 million Tier 2
bond issued in June 2011, compared to the Group’s other
debt instruments, and the timing of the debt repayment
during the year. In September 2012 the Group redeemed the
$750 million cumulative preference securities. The costs
associated with this instrument are accounted for as
non-controlling interests. Total finance costs, including the
cost of this instrument, reduced by approximately £8 million.
These finance costs are expected to reduce by over 35% in
2013 as a result of the full year effects of the debt reduction
undertaken in 2012.
Administration expenses increased by 6% to £3,592 million,
with increased costs in Nedbank, primarily due to higher
staffing to service increased volumes, and Emerging Markets,
driven by project costs and inflationary increases. Old Mutual
Wealth costs increased, with expense savings offset by
transformation and development spend, and the inclusion of
OMAM(UK) for the first time in 2012.
The following Group central costs were included in
administration expenses:
■ Corporate costs were down 5% to £54 million
(2011: £57 million), due to our ongoing efforts to reduce
corporate costs in line with the Group’s previously
announced targets. Around 12% of these costs were
incurred in South Africa in respect of activities which
support the corporate centre. A further 8% were
unavoidable listed holding company costs, including
corporate insurances, audit fees and other recurring
professional fees. We consider them to be low compared
to peers.
■ Net interest payable to non-core operations reduced by
22% to £18 million (2011: £23 million), due to lower
prevailing rates on the loan notes to our Bermuda business.
■ The other net expenses reduced to nil (2011: £18 million),
primarily due to higher Group seed investment gains
generated at USAM’s affiliates, offsetting expenses.
Acquisition expenses increased by 4% to £1,022 million,
primarily due to increased new business volumes in Emerging
Markets and increased trail commission in Old Mutual
Wealth, resulting from improved market performance in the
year, which more than offset the impact of lower new
business volumes.
Summary MCEV results
Adjusted Group MCEV per share
The adjusted Group MCEV per share increased by 13% to
220.3p, with 4,893 million shares in issue (2011: 5,562 million).
Adjusted operating earnings contributed 15.7p per share and
non-operating earnings and other movements contributed
10.5p per share.
The positive contribution from non-operating earnings and
other movements was primarily due to the increase in the
uplift for the Nedbank market value of 11.9p per share and
the sale of Nordic resulting in an increase of 12.4p per share.
This comprised the Nordic sale proceeds of 3.6p, share
consolidation impact of 26.8p, offset by the Special Dividend
paid on 7 June 2012, which reduced MCEV per share by
18.0p. Foreign exchange movements from rand depreciation
had a negative impact of 13.4p per share.
Adjusted Group MCEV per
share at 31 December 20111
Covered business
Non-covered business
Adjusted operating Group MCEV
earnings per share1
Economic variances and other earnings
Foreign exchange and other
movements
Dividends paid to ordinary and
preferred shareholders
Nedbank market value adjustment
BEE and ESOP adjustments
Mark to market of debt
Impact of share consolidation
Net proceeds from Nordic sale
Special dividend
Non-operating MCEV earnings
and other movements
Adjusted Group MCEV per share
at 31 December 20121
9.0
6.7
7.2
(13.4)
(6.1)
11.9
(0.3)
(1.2)
26.8
3.6
(18.0)
p
194.1
15.7
10.5
220.3
1 The weighted average number of shares used to calculate adjusted
Group MCEV per share and adjusted operating Group MCEV earnings
per share does not include preference shares.
The adjusted operating Group MCEV earnings per share
decreased by 3.7p to 15.7p, including Nordic, and by 1.6p
to 15.2p excluding Nordic. Non-covered business operating
earnings increased by 0.7p and now represent 43% of total
operating earnings (2011: 31%).
Covered business operating MCEV earnings per share
decreased by 4.4p to 9.0p, including Nordic, and by
2.4p to 8.6p excluding Nordic. Excluding Nordic, the
movements include:
■ Emerging Markets earnings in sterling decreased 0.7p
due to the weakening of the rand exchange rate. In rand
terms, earnings increased due to a higher new business
contribution, expected return and positive experience and
assumption changes in respect of mortality and disability.
This was partially offset by experience losses, including
one-off development expenses in 2012 and significantly
lower persistency profits, following the release of
short-term termination provisions and alignment of
persistency experience to assumptions at the end of 2011.
■ Lower earnings from Old Mutual Wealth reflected
restructuring initiatives of 1.8p, largely as a result of the
change of strategy, including the future operation of the
selected European businesses on a manage for value basis
and lower positive rebate variances compared to 2011.
■ Higher earnings from Old Mutual Bermuda as a result of
positive persistency experience on variable annuity products,
and the lightening of persistency and expense assumptions.
67
How we have performedFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business FINANCIAL
REVIEW continued
Non-covered business operating earnings per share
increased by 0.7p to 6.7p, including Nordic, and increased
0.8p to 6p excluding Nordic. The increase excluding the
contribution from Nordic was a result of higher earnings from
the banking businesses, with Nedbank’s earnings a result of
higher net interest income and non-interest revenue. This was
partially offset by lower earnings from Mutual & Federal.
At end-2012, 63% of the adjusted Group MCEV, pre-debt
and net other business, was in emerging market countries
(including Nedbank and Mutual & Federal businesses)
(2011: 55%), with 22% in European businesses (2011: 35%)
and 15% in the US (2011: 10%).
The RoEV is calculated as the adjusted operating Group
MCEV earnings after tax and non-controlling interests of
£789 million (2011: £1,055 million) divided by the opening
Group MCEV.
During the period Old Mutual owned on average 54.6% of
Nedbank. At end-2012, the market capitalisation of Nedbank
was R90.5 billion, equivalent to £6.6 billion (2011: R69.6 billion;
£5.5 billion). On a constant currency basis, Nedbank’s market
capitalisation increased by £1.5 billion from £5.1 billion at
end-2011, due to a 30% increase in its share price over
the period.
Free surplus generation
Core continuing operations generated £814 million of
free surplus (2011: £803 million), of which £593 million
(2011: £552 million) was generated by the LTS division.
Covered business generated £493 million (2011: £431 million)
with the increase attributable to lower new business investment
and higher economic variances resulting from strong equity
market performance partly offset by lower transfers from
value of in-force business and adverse experience variances
mainly arising from one-off development and restructuring
costs. We expect the value of our remaining in-force business
to generate a surplus of about £1.5 billion over the next three
years. Over 50% of this surplus is expected to come from
Old Mutual Wealth.
Non-covered business generated £321 million
(2011: £372 million), with the decline mainly attributable
to the lower underwriting result in Mutual & Federal.
Operational cash inflows to holding company
Inflows to holding company included hard currency
operational inflows of £212 million, consisting of £145 million
from Old Mutual Wealth and £67 million from US Asset
Management. Distributions of £258 million were made by the
South African businesses, with £108 million from Emerging
Markets, £138 million from Nedbank and £12 million from
Mutual & Federal.
Operational cash outflows and distributions by
holding company
Operational outflows included finance costs of £142 million
and Head Office costs of £54 million.
Ordinary cash dividends totalled £268 million. Dividends of
£147 million were paid to shareholders on the South African
register, funded directly by the South African businesses.
Net capital flows
Capital inflows included proceeds from the sale of the Nordic
business, Dwight and Old Mutual Capital in the first half of
2012 and the sale of Old Mutual Wealth’s Finnish business in
the second half of 2012. The Group also sold 75% of its
Zimbabwean operation to an OMSA subsidiary for an initial
consideration of R1.1 billion, with deferred consideration of
R0.5 billion potentially payable in 2015, subject to valuation.
We have agreed terms for the transfer of the Colombian and
Mexican businesses to OMSA, subject to regulatory approval,
and are continuing to prepare for the transfer of certain other
emerging market subsidiaries to align their legal structures
with their operational management.
Capital outflows included:
■ Payment of the Special Dividend of £1.0 billion
■ A cash transfer of £38 million ($61 million) into Old Mutual
Bermuda in July 2012 in response to the expected new
Bermudan solvency requirements. This formed part of the
total additional capital of $571 million transferred to
Bermuda, the balance being comprised of $250 million of
new inter-company loan notes and $260 million of Group
seed investments
■ Cash of £1,073 million used to repay debt during the period
■ The settling of an inter-company loan with Nedbank.
Liquidity
At 31 December 2012, the Group had available liquid
assets and undrawn committed facilities of £1.7 billion
(2011: £1.5 billion). Of this, available liquid assets at the
holding company were £0.5 billion (2011: £0.4 billion).
In addition to the cash and available resources referred
to above at the holding company, each of the individual
businesses also maintains liquidity to support its normal
trading operations.
Cash and liquidity
Opening cash and liquid assets
at Plc at 1 January 2012
Operational inflows
Operational receipts
Distributions from South African operations
Total operational inflows
Operational outflows
Interest paid
Group Head Office costs
Inter-company interest and other
operational outflows
Ordinary cash dividends
Total operational outflows
Net capital flows
Closing cash and liquid assets
at Plc at 31 December 2012
68
£m
441
212
258
470
(142)
(54)
(9)
(268)
(473)
34
472
Old Mutual plcAnnual Report and Accounts 2012 Capital and leverage
Debt strategy, profile and maturities
At 31 December 2012 the Group had applied £1.52 billion
of cash to the repayment of debt since 1 January 2010,
successfully completing its £1.5 billion initial debt
reduction target set in March 2010. The £1.52 billion
debt repaid included:
■ £110 million (net of debt raised) repaid in 2010
■ £339 million (net of debt raised) repaid in 2011
■ £1,073 million repaid in 2012.
The debt repaid in 2012 included:
■ £144 million to repay €200 million of a €750 million
Tier 2 bond in January 2012
■ £459 million to repay £388 million nominal of the
£500 million senior debt (maturing in 2016) in August 2012
■ £464 million to repay the $750 million cumulative
preference securities in September 2012
■ £6 million to repay subordinated debt in December 2012.
A further £180 million of debt will be repaid in due course, in
accordance with the plans set out in the shareholder circular
on the Nordic sale. Any decisions regarding the repayment
of further debt will take account of capital treatment and the
economic impact of the repayment and, where appropriate,
will be subject to regulatory approval.
In the medium-to-long term the Group has further first calls
on debt instruments amounting to £620 million in 2015 and
£348 million in 2020. In addition the Group has £112 million
of senior debt maturing in 2016, representing the amount
outstanding following the tender in 2012. The £500 million
Tier 2 bond issued in June 2011 matures in 2021.
Group debt summary
Senior gearing (net of holding
company cash)
Total gearing (net of holding company
cash)
Book value of debt – MCEV basis
Book value of debt – IFRS basis
Total interest cover1
Hard interest cover1
2012
£m
2011
(3.0)%
0.5%
8.5%
1,607
1,569
15.6%
2,515
2,529
8.8 times
1.9 times
7.7 times
1.7 times
1 Total interest cover and hard interest cover ratios exclude Nordic profits
in current and prior periods.
Exposure to sovereign debt in Portugal, Italy,
Ireland, Greece, Spain and France
At 31 December 2012 the Group had no direct exposure
to the sovereign debt of Portugal, Italy, Ireland, Greece
and Spain. The exposure to French sovereign debt at
31 December 2012 was less than £3 million.
Financial Groups Directive results
The Group’s regulatory capital surplus, calculated under the
EU Financial Groups Directive (FGD), at 31 December 2012
was £2.0 billion (2011: £2.0 billion). The £2.0 billion FGD
surplus represented a coverage ratio of 158%, compared to
154% at end-2011. When stressed against a 1 in 10 shock
event, the Group’s FGD surplus would fall to £1.6 billion.
The FGD surplus was increased by statutory profits, but this
was offset by the increase in the local regulatory capital
requirement in Bermuda and the repayment of the Tier 2
subordinated debt. The sale of Nordic increased the FGD
surplus by £1.6 billion. This was largely offset by the payment
of £1.2 billion in special and ordinary dividends during 2012.
The future level of capital required in Old Mutual Bermuda,
on both an economic and a regulatory basis, will be
influenced by the extent and nature of the run-off of its book
and the amount of the investment hedge in place. Taking
account of the higher than anticipated surrender experience,
we expect to review the regulatory capital requirement with
the Bermuda Monetary Authority during 2013.
The Group’s subsidiary businesses continue to have strong
local statutory capital cover.
Business local statutory capital cover
31-Dec-12
31-Dec-11
Old Mutual Life Assurance
Company (South Africa)
Mutual & Federal
UK
Nedbank2,3
Common equity Tier 1:
Tier 1:
Total:
Bermuda
4.0x
1.8x1
2.3x
11.4%
12.9%
14.9%
1.6x4
4.0x
1.5x
2.0x
10.5%
12.0%
14.6%
2.3x
1 2012 local statutory cover was based on interim SAM framework
for non-life insurers, implemented on 1 January 2012.
2 This includes unappropriated profits.
3 2012 and 2011 Nedbank capital ratios are calculated on a
Basel II.5 basis.
4 Based on Bermuda’s expected new regulatory regime.
Regulatory capital
Ordinary equity
Other Tier 1 equity
Tier 1 capital
Tier 2
Deductions from total capital
Total capital resources
2012
20111
£m
4,948
572
5,520
1,343
(1,289)
5,574
%
89%
10%
99%
24%
(23)%
100%
£m
4,565
593
5,158
1,903
(1,360)
5,701
1 Capital as reported to the FSA. Numbers may differ slightly from those reported in the Annual Report and Accounts for 2011.
%
80%
10%
90%
33%
(23)%
100%
69
How we have performedFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
FINANCIAL
REVIEW continued
The Group’s FGD surplus is calculated using the ‘deduction
and aggregation’ method, which determines the Group’s
capital resources less the Group’s capital resources
requirement. Group capital resources is the sum of all the
business units’ net capital resources, calculated as each
business unit’s stand-alone capital resources less the book
value of the Group’s investment. The Group’s capital
resources requirement is the sum of all the business units’
capital requirements. The contribution made by each business
unit to the Group’s regulatory surplus is different from the
locally reported surplus as the latter is determined without the
deduction for the book value of the Group’s investment. Thus,
although all the Group’s major business units have robust
local solvency surpluses, not all make a positive contribution
to the Group’s FGD position. The Group’s regulatory capital
was calculated in line with the FSA’s prudential guidelines.
Economic capital
We continue to manage our business and monitor solvency
internally on an economic capital at risk basis, which
expresses solvency at a 99.93% confidence level. We are
comfortably solvent on this basis with a current solvency ratio
of over 160% (estimated, unaudited figure), and are therefore
well positioned for the transition to Solvency II in the UK and
its South African equivalent, Solvency Assessment and
Management. Economic capital represents our internal view
of our business and is more representative of the underlying
risks. It allows for diversification both between different risks
within entities and across sectors and territories.
Group RoE and margin and cost-saving targets
At the 2009 Preliminary Results and Strategy Update, the Group introduced three-year RoE and cost-saving targets. Progress against these
targets is set out below.
RoE and margin targets
Long-Term Savings
Emerging Markets1
Old Mutual Wealth2
LTS Total
USAM operating margin3
2012
2011
Target
24%
13%
20%
21%
24%
16%
20%
15%
20%-25%
12%-15%
16%-18%
25%-30%
1 Within Emerging Markets, African and Asian RoE are calculated as return on allocated capital.
2 Old Mutual Wealth RoE is calculated as IFRS AOP (post tax) divided by average shareholders’ equity, excluding goodwill, PVIF and other acquired intangibles.
3 USAM operating margin measures AOP as a percentage of revenue and is stated after non-controlling interests and excluding gains/losses on seed capital but makes no
adjustment for affiliates held for sale or disposed in the period. The results for the comparative period have been restated to exclude gains/losses on seed capital.
Cost reduction targets
Long-Term Savings
Emerging Markets
Old Mutual Wealth
LTS Total
USAM
Group-wide corporate costs
Total
Cumulative
run-rate
savings
Cumulative
cost incurred
to date
21
80
101
15
17
133
–
56
56
20
1
77
£m
2012
run-rate
target
5
60
65
10
15
90
RoE and margin targets
Emerging Markets RoE remained high at 24%, with increased
post-tax profits offset by an increased allocated capital base,
supporting growth and expansion plans in Africa. Old
Mutual Wealth RoE reduced to 13%, with lower operating
profits partially offset by a more efficient capital base,
following capital flows to the Group in 2012.
Cost reduction targets
We have delivered £133 million of cumulative run-rate
savings, more than the £90 million run-rate target announced
in March 2010, with all business units meeting or exceeding
targets. The original £100 million target was restated to
exclude Nordic following its sale. The cost incurred to deliver
run-rate savings in 2012 totalled £1 million.
Group corporate cost run-rate savings of £17 million were
delivered through ongoing restructuring at the Group’s
Head Office.
USAM’s operating margin improved from 15% to 21% on a
reported basis. USAM’s operating margin from continuing
business, which excluded divested affiliates, was 24%
(2011: 24%) after non-controlling interests and 29%
(2011: 27%) before non-controlling interests.
Nedbank’s RoE (excluding goodwill) was 16.4%, an
improvement of 1.1% on 2011, but was 1.7% below Nedbank’s
medium-to-long term target of 5% above the cost of ordinary
shareholders’ equity.
70
Old Mutual plcAnnual Report and Accounts 2012
Statutory results
Reconciliation of Group AOP and IFRS profits
Adjusted operating profit
Adjusting items
Non-core operations (including Bermuda)2
Profit before tax (net of policyholder tax)
Income tax attributable to policyholder returns
Profit before tax
Total tax expense
Profit from continuing operations after tax
Profit from discontinued operations after tax
Profit after tax for the financial year
Other comprehensive income
Total comprehensive income
Attributable to:
Equity holders of the parent
Non-controlling interests:
Ordinary shares
Preferred securities
Total non-controlling interests
Total comprehensive income
2012
1,614
(459)
165
1,320
75
1,395
(472)
923
564
1,487
(835)
652
476
176
652
£m
20111
1,515
(329)
(183)
1,003
(9)
994
(225)
769
198
967
(1,400)
(433)
(408)
(25)
(433)
(87)
62
126
50
1 The comparative period has been restated to reflect Nordic as discontinued.
2 Non-core operations include £161 million of profit after tax from Bermuda and £4 million of inter-segment revenue and profit from discontinued operations after tax, reflecting
the results of Nordic.
Adjusting items
Key adjusting items made to IFRS profits to determine AOP:
■ A £126 million loss on Group debt instruments held at fair
value, resulting from a tightening in credit spreads, was
excluded from AOP
■ A £123 million amortisation charge in respect of other
acquisition accounting adjustments primarily relating to
the remaining Skandia business (ie excluding Nordic),
was excluded from AOP
■ £113 million of investment returns on policyholder
investments in Group equity and debt instruments were
included in AOP
■ A £78 million charge for short-term fluctuations in
investment return, largely as a result of lower returns on
cash and bonds in South Africa compared to our LTIR
assumption and expected asset allocation.
Non-core business units – Bermuda
The IFRS post-tax profit for the period was £161 million
(2011: £178 million loss), driven primarily by the reduction
in Universal Guaranteed Minimum Accumulation Benefits
(GMAB) reserves and a realised gain on the fixed income
portfolio, partially offset by a full write-off of all remaining
deferred acquisition costs.
At 31 December 2012, 67% of the Universal Guarantee Option
(UGO) GMAB contracts by guarantee amount had passed
their five-year top-up mark. The cash cost of fifth anniversary
top-ups paid was £268 million, further reduced by positive
equity market movements. The estimated outstanding cash
cost of fifth anniversary top-ups was £66 million at end-2012.
71
How we have performedFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business During the period we paid corporation tax of approximately
£300 million. Around 90% was paid in South Africa, where a
large proportion of the Group’s profits were generated. Total
taxes paid and collected in the year were around £1 billion.
Looking forward, and depending on market conditions and
profit mix, we expect the ETR on AOP in future periods to
range between 25% and 28%. We are reviewing the
proposed changes to South African life business taxes
announced in the South African budget on 27 February 2013,
which may impact this range if enacted.
Discontinued operations – Nordic
Profit from discontinued operations included a £564 million
profit on the disposal of Nordic. A brand impairment of
£35 million attributable to the sale was recognised in the
second half of 2012. We anticipate further IT and rebranding
costs of around £60 million, directly related to the transaction
in 2013.
Other comprehensive income
Other comprehensive income for the period showed a loss of
£835 million (2011: £1,400 million loss), driven by the recycling
of the foreign exchange reserves associated with Nordic from
other comprehensive income through the income statement
and unrealised foreign exchange losses, largely on the net
asset value of the South African businesses.
Non-controlling interests
Non-controlling interests’ share of total comprehensive
income was £176 million (2011: £25 million loss), mainly
reflecting non-controlling interests’ share of Nedbank’s profit,
partially offset by their share of unrealised losses generated
on the translation of Nedbank.
2012
2011
% change
£m
24.9p
1,173
10.8
220.3p
789
15.7p
8.1%
12.9p
667
10.8
194.1p
1,055
19.4p
10.7%
93%
76%
–
13%
(25)%
(19)%
FINANCIAL
REVIEW continued
We experienced significantly higher than expected surrender
rates for 2012. The UGO GMAB guarantee reserve at
31 December 2012 was £135 million (2011: £665 million).
At 31 December 2012, around 80% of non-Hong Kong UGO
policies and around 60% of Hong Kong policies had been
surrendered on or after the fifth anniversary date.
Further information on Bermuda is included in the
Business Review on pages 63-64.
Income tax attributable to policyholder returns
Under IFRS, tax on policyholder investment returns is included
in the Group’s tax charge rather than being offset against the
related income. The impact is to increase profit before tax,
with a corresponding increase to the tax charge. In 2012,
tax on policyholder investment returns was £75 million
(2011: £9 million credit), of which £27 million was attributable
to Old Mutual Wealth and £48 million to Emerging Markets.
In 2011, a smoothing adjustment in respect of Old Mutual
Wealth’s previous years’ deferred tax assets gave rise to an
AOP gain of £32 million; there was no such gain in 2012.
Total tax expense
The effective tax rate (ETR) on AOP increased from 23% in
2011 to 27% in 2012. Over 88% of the 2012 AOP tax charge
relates to Emerging Markets and Nedbank. Movements in
these business units have a correspondingly large impact on
the Group’s ETR. The increase in ETR was largely a result of:
■ A 2% increase in Nedbank’s ETR to 27%, due mainly to
a lower proportion of untaxed dividend income
■ A return to a more normal ETR of 27% (2011: 21%) in
Emerging Markets, which also saw a reduction in the
proportion of low taxed income in 2012
■ An increase in AOP tax rate in Old Mutual Wealth from
12% to 22%. This was principally driven by market
fluctuations resulting in significantly less exempt dividend
income being allocated to the shareholder.
Supplementary financial information (data tables)
Summarised financial information (as reported)
IFRS results1
Basic earnings per share
IFRS profit after tax attributable to equity holders of the parent
MCEV results2
Adjusted Group MCEV (£bn)
Adjusted Group MCEV per share
AOP Group MCEV earnings (post-tax and non-controlling interests)
Adjusted operating Group MCEV earnings per share
Return on Group MCEV
1 The comparative period has been restated to reflect Nordic as discontinued.
2
Includes Nordic and US Life.
72
Old Mutual plcAnnual Report and Accounts 2012 Our risks
Here we describe how we manage
the major risks to which the Group
and its businesses are exposed
What
we do
Where we
are going
How we
have
performed
Our risks
Financials
How we govern our business
O
u
r
r
i
s
k
s
Contents
Overview
Managing our economic risks
Risk profile of the Old Mutual
Group by region
The Group’s current topical risks
74
76
77
79
73
risk and Capital
ManaGeMenT
Old Mutual has invested
significantly in enhancing
its risk and capital
management over
the past four years.
this investment has been led by the Board and
senior management, driven by a desire to support
sound business decisions and attribute capital
according to an accurate assessment of the
economic risks involved. despite the delays in
regulatory reforms under solvency ii, south africa
is progressing with their equivalent development
which is due to come into effect in January 2015.
We believe that this early investment is timely and
positions the Group well to comply with the new
regulatory requirements as they arise. We are
already sufficiently capitalised on an economic
capital basis to comply with the new requirements
as currently drafted.
We began the year with an established risk and governance
framework set out in the Group Operating Model, economic
capital tools developed through at least two full iterations,
and transparent processes for managing, monitoring and
controlling risks. During 2012 we merged these new tools and
processes into business-as-usual operations and embedded
them more deeply into the underlying businesses. We will
continue to refine structures and processes, but the overall
governance structures are stable and provide opportunities
to obtain more detailed management information as required.
Risk frameworks, governance and the Group’s internal
capital model are overseen centrally but implemented by
our businesses locally so that local requirements can be
addressed appropriately. This is reinforced through senior
Group executive representation on business unit regulatory
boards coupled with formal dual reporting for all key
control functions.
In 2012 we revisited the risk strategy set in 2010, and now
separately consider each of the regions in which we operate.
This has confirmed that each region is sufficiently capitalised
in its own right and that the distribution and allocation of
capital to the relevant businesses in each region largely
reflect the different risk profiles within those regions. This has
also supported the decision and successful execution of our
debt repayment programme. Even when applying significant
economic stresses to our current capital, the Group remains
sufficiently capitalised. We have also identified management
actions that could be taken to remedy the Group’s capital or
liquidity position in a severe shock event where capital or
liquidity levels significantly breach our risk appetite limits for
a sustained period. In future we will be seeking to make use
of diversification within these different regions in line with the
Group’s overall strategy.
The sale of the Nordic business in Q1 2012 did not change
our overall risk profile significantly, as Nordic had very similar
risks to the other European business. Broadly speaking, the
risk strategy set in 2010 indicated a preference to reduce
non-banking credit risk (subsequently achieved through the
2011 sale of US Life) and to increase liability risk. While the
overall strategy to increase liability risk but contain credit risk
continues to make sense, evidential experience has shown
that this will be difficult to achieve by organically growing
pure risk products alone.
74
Old Mutual plcAnnual Report and Accounts 2012 In 2013 risk management activity will build on the investment
made in the past, while supporting the following objectives:
■ Ensure that risk measures are embedded and influences
the behaviours of our staff and management through our
employee performance management process
■ Focus on our customers’ needs and requirements, and
review our product set to ensure that our products remain
appropriate for our customers
■ Further embed the use of relevant tools and skills to
support us in taking on risk through new product offerings
and entry into new territories, thus supporting our
expansion into Africa and further diversification of our
business in Old Mutual Emerging Markets
■ Improve expense management and control throughout
Old Mutual Wealth as the business implements its new
operating model, including moving to an efficient cost
base for the heritage books
■ Take on more liability risk in our Old Mutual Wealth
business as appropriate.
The following pages give more details of our risk preferences
and current risk profile, with an overview of our current
topical risks.
sue kean
Group Chief risk Officer
The Group’s overall risk profile, reflected by
our economic capital results, is stable and
indicates that the Group is comfortably
within appetite on all capital measures,
despite the weakened global recovery.
The outlook for earnings remains volatile. The most significant
external risks to earnings relate to the concentration of
businesses in South Africa and the translation of earnings
from rand to sterling. The level of the rand is very susceptible
to changes in the level of foreign investment in South African
government debt. This remains high as the prolonged period
of low growth in the US and Europe drives foreign investors
to seek yield elsewhere. Any reversal of these flows could
potentially trigger rapid decline in the rand, reducing our
sterling earnings. Having modeled scenarios involving
a severe rand drop, we are comfortable that the Group
has sufficient capital and liquidity headroom to withstand
such events.
As the Group’s businesses position themselves for growth
over the next few years, we recognise that this could increase
short-term operational risk – particularly in Old Mutual
Wealth, where the pace and level of change are greatest.
Generally, at business unit level the increase in exposures is
driven primarily by structural changes and cost control
measures offset by continuing expected improvements to the
control environment. Our relative exposure to operational risk
is expected to reduce over the planning period, although in
absolute terms it will remain stable due to business growth.
Exposure to credit risk has increased slightly, reflecting growth
in Nedbank and Old Mutual Finance, but remains within
appetite limits. In the current environment, our South African
business remains exposed, from an earnings perspective, to
interest rate risk. The Group remains underweight compared
to its risk strategy goal of increasing liability risk, and business
plans include a number of actions to increase this exposure
while meeting our risk and return requirements. Old Mutual
Bermuda (OMB), has significantly reduced market risk
exposures including volatility risk, due to the hedging
programme introduced in March 2012 and favourable
surrender experience this year. This has greatly benefited
the overall Group capital position.
Our strategic emphasis on customer focus and continuing
senior-level engagement with regulatory policymakers
position us well to address changes such as the UK’s Retail
Distribution Review and twin peaks regulation in the UK
and SA.
75
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessOur risks
risk and Capital
ManaGeMenT continued
schedule. During 2012 we revised our FGD target metric
to a coverage ratio, rather than an absolute amount, using
stress and scenario testing techniques from our economic
capital framework. The coverage ratio at December 2012
is comfortably above our new target (for more information on
the Financial Groups Directive results see page 69).
Our risk appetite framework has evolved significantly over
the past few years and the Group’s internal capital model
supports the setting of our integrated risk business strategy.
We have enhanced the methodology, notably in the way risk
appetite limits are set and agreed with each business unit. In
particular, we have made limit-setting an iterative part of the
business planning process to support the setting of local risk
limits that reflect local business plans rather than being set in
a purely top-down fashion. As part of this process we set risk
limits by risk type at both Group and business unit level.
Managing our economic risks
We continue to manage our business and monitor solvency
internally on an economic capital basis, which expresses
solvency at a 99.93% confidence level (ie covering a seven
in 10,000 years event). We are comfortably solvent on this
basis with a current solvency ratio in excess of 160%1, and thus
well positioned for the transition to Solvency II and the
Solvency Assessment and Management regime (SAM) in
South Africa. The economic capital basis represents our
internal view of our business and is more representative of
the underlying risks. It allows for diversification both between
different risks within entities and across sectors and territories.
Old Mutual currently assesses and reports regulatory capital
adequacy under the EU’s Financial Groups Directive (FGD).
Our planned transition to managing regulatory capital
adequacy on a Solvency II basis has been deferred in line
with the delay to the implementation of the Solvency II
We are comfortably solvent on
an economic capital basis with
a current solvency ratio in excess
of 160%1.
Periodically through the year business units calculate their risk exposures against the appetite set by the Group. The table below
summarises the four quantitative measures we use to express our risk appetite limits and exposures:
risk appetite limits
Metric
Explanation
Group limit definition
Economic capital at risk (ECaR)
Earnings at risk (EaR)
Cash flow at risk (CFaR)
The reduction in post-tax economic value (broadly
defined as a market value balance sheet basis for
life companies and IFRS equity for non-life
companies) over a one-year forward-looking time
horizon that should only be exceeded seven times
in 10,000 years (99.93% confidence level).
ECaR helps us to optimise risk-based decisions.
The stress tests underlying ECaR allow us to
monitor our exposures and deepen our
understanding of where the business could
further improve its capital allocation.
ECaR is similar to the ‘solvency capital requirement’
measure in Solvency II and has been calculated
and used within the Group for more than five years.
The reduction in pre-tax IFRS adjusted operating
profit (AOP) over a one-year forward-looking time
horizon that should only be exceeded once in
10 years (90% confidence level).
The reduction in the cash portion of earnings over
a one-year forward-looking time horizon that
should only be exceeded once in 10 years
(90% confidence level).
Available financial resources should not fall below
100% of (internal) ECaR.
EaR as a percentage of pre-tax AOP should not
rise above 70%.
The cash proportion of earnings should not fall by
over £500 million more than once in 10 years.
Operational risk (OpRisk)
The reduction in pre-tax economic value due to
one in 10 year unexpected operational loss events
(90% confidence level).
OpRisk as a percentage of pre-tax AOP should
not rise above 10% of planned earnings over the
year ahead.
1
Estimated, unaudited figure
76
Old Mutual plcAnnual Report and Accounts 2012 In addition to quantitative risk appetite limits, we also use
qualitative risk appetite principles and statements to guide
our business units and help to improve the clarity of our risk
strategy in line with the Group’s risk appetite. For 2012 all
Group risk metrics showed a lower level of risk exposure
and Old Mutual is comfortably within appetite on all capital
measures and earnings volatility. The reduction in risk
exposure results mainly from steps taken to de-risk
Bermuda and from favourable capital market performance.
Group currency risk and Nedbank’s credit and counterparty
risk remain the top two quantitative contributors to economic
capital at risk. As discussed below, the most significant risk to
sterling earnings is the concentration of source earnings in
rand in South Africa.
Risk profile of the Old Mutual Group
by region
Our Group risk strategy distinguishes between risk and return
preferences. The Group’s risk preferences outline our position
on different risk types, identifying the risks that we actively
seek, avoid or view neutrally. The return preferences are
driven by the probability and size of the returns.
The risk profile of the Group is based on stand-alone
economic capital at risk, ie the relative contribution of each
risk is determined before allowing for the impact of
diversification between risks. We are moving towards a
‘three regions’ structure for our risk strategy and target risk
preferences. The pie charts below set out our current risk
profile by region (with the size of the pies providing an
indication of the relative significance in capital terms of each
region), and show that we are well diversified at a regional
level. Each region is sufficiently capitalised and does not rely
on diversification between regions for solvency purposes.
For Old Mutual Wealth, market risk (policyholder) consists of
the impact of changes in fund-related management
fees earned from client portfolios as a consequence of
movements in asset markets. The classification of this risk
is consistent across our life businesses, whereas for our
asset management businesses this risk exposure is currently
classified as business risk.
The risk profiles for the Old Mutual Wealth region, and
the Emerging Markets, Nedbank, and Mutual & Federal
region have remained stable over the period. The relative
exposure to market risk (policyholder) in USAM and OMB
has reduced significantly due to the de-risking exercise in
Bermuda. This resulted in an increase in the relative contribution
of USAM to the overall risk profile, as well as an increase in
the relative contributions of both operational and business risk.
USAM and OMB (6%)
OMW (27%)
Emerging Markets*, Nedbank and M&F (67%)
23%
6%
11%
26%
38%
5%
32%
7%
6%
24%
3%
7%
16%
6%
15%
46%
Market (policyholder)
Market (shareholder)
Credit and counterparty
Business
Liability
Operational
Currency
29%
*Note that Emerging Markets includes our exposure to South America & Asia.
77
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessOur risks risk and Capital
ManaGeMenT continued
The Group’s current overall risk profile is set out below. This
allows for additional risks at Group level not included in the
pie charts, most notably currency translation risk due to our
significant rand exposure. The expected return relative to
target was developed as part of our 2010-2012 business and
risk strategy setting, and reflects the risk-adjusted expected
return. We will be reviewing the risk-adjusted expected return
during 2013.
Our Group risk profile changed over 2012 due to favourable
lapse experience and the implementation of management
actions in Bermuda decreasing our market risk (policyholder),
and a reallocation between market risk (policyholder) and
currency risk.
We will continue to enhance our economic capital and stress
and scenario testing framework, and further embed these
within our business during 2013.
risk Category
Market (policyholder)
Credit and counterparty
Business
Market (shareholder)
Liability
Operational
Currency
risk preference
2010 profile 2011 profile 2012 profile
Expected
return
relative
to target
For
Against*
Neutral
Against
Strongly for**
Strongly against
NA***
26%
22%
24%
4%
8%
12%
4%
27%
13%
25%
6%
13%
11%
5%
17%
Excellent
11% Neutral
29% Good
4%
15%
9%
Poor
Excellent
Very poor
15% NA***
* Unless taken in the form of well governed and managed banking-related credit risk
** Assumes risk is correctly priced
*** No risk preference is set for currency as this risk is essentially a balance sheet translation risk of our SA business from rand into sterling
78
Old Mutual plcAnnual Report and Accounts 2012 The Group’s current topical risks
The table below summarises the Group’s top five topical risks, which are currently at the top of our agenda. These risks are closely monitored
and overseen by Group, which gives regular updates to the Board and Executive Risk Committees. Our business is also impacted by a number
of inherent risks, such as the exposure to market levels (which drives a significant proportion of our capital requirement). Although market risk
(policyholder) is material, a large portion is from the inherent risk within our product offering, as we are exposed to the impact of market
movements on asset-based fees generated from client-selected investments. For further information on our inherent and significant risks, please
refer to our website www.oldmutual.com/reports2012.
risk description
2012 and beyond
risk mitigation and management action
During 2012, South African Government debt
was downgraded and the rand depreciated
significantly and is expected to remain volatile.
Bond yields reduced during the year, increasing
the value of certain liabilities in the South African
business. In addition, Old Mutual Emerging
Markets’ IFRS earnings are sensitive to further
falls in bond yields.
Despite this, a positive climate for doing business
remains in South Africa. The economic and
demographic trends provide a strong case for
investment and the country has a high level of
fiscal discipline, with a strong banking sector
which is well capitalised.
Our credit risk remains stable. However,
there has been an increase in our unsecured
loan books in both Nedbank and OMF in a
market with weakened credit characteristics
amongst consumers.
If low economic growth persists in South Africa,
this may have an impact on impairment levels.
However this risk would be mitigated to some
extent if lower interest rates persist.
While future dividend flow from subsidiaries is
still heavily impacted by rand risk, this is partly
mitigated by the proposed policy of linking
dividends to earnings.
In addition, the Group uses currency hedging
to partially mitigate the risk of a depreciation
in the value of rand receipts from the
South African business.
Partial hedging was implemented during 2012
to protect against further interest rate reductions.
We are currently enhancing the credit risk limit
framework to enable greater granularity and
consistency of limits across the Group. We are
closely managing credit loss ratios, though
these are broadly within target range and
have improved in the retail area.
Nedbank and OMF apply cautious
underwriting criteria compared to some of
their competitors, to the extent of constraining
growth vis-à-vis peers.
1. Currency translation risk and
sa market risk
The bulk of the Group’s capital is held in
South Africa to match the risks faced by
the business there. In addition, a significant
portion of our earnings comes from our
South African businesses.
Earnings and surplus capital are directly
impacted by a depreciation in the rand.
In addition to this, earnings from our South African
business are exposed to market movements in the
South African market.
2. Credit risk across the Group
One of our largest single quantifiable risks to
the Group is our exposure to banking credit risk
through our exposure to Nedbank.
Despite tight controls and processes, profits
remain sensitive to relatively small movements
in the credit loss ratios.
Our exposure to Nedbank is primarily contagion
risk to earnings, as Nedbank’s capital and
liquidity requirements are both met from its
own resources.
There is also credit risk within the South African
Life business through:
■ Our unsecured lending joint venture,
called Old Mutual Finance (OMF)
■ Old Mutual Specialised Finance (OMSFIN)
■ The South African Life business, predominantly
through the management of assets backing
annuity products
■ A building society in Zimbabwe, although
the exposure is very small.
79
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessOur risks risk and Capital
ManaGeMenT continued
risk description
2012 and beyond
risk mitigation and management action
3. Old Mutual Wealth execution risk
The key risk here is one of execution due to the
volume and complexity of change rather than
funding or capital constraints.
The level of operational risk within Old Mutual
Wealth is increasing in the short term, reflecting
significant changes to the operating model and
staffing changes resulting in reduced continuity.
We are increasing our focus on the control
environment and prompt escalation during this
period in order to mitigate the risk.
While this is contrary to the Group’s stated
strategy of reducing overall operational risk,
we have made an explicit exception as the
operational risk increase is temporary and is
necessary to address a larger strategic risk to
the sustainability of the Old Mutual Wealth
business model.
The business plan seeks to transform Old Mutual
Wealth into a simpler, unified business with
updated IT systems. The strategy, focusing mainly
on the UK and International markets, is to take on
more fund management and product risk to
increase margins.
There has been significant investment in IT and
change governance over the past year. More
recently we have changed the operating model
to place more execution responsibility at the Old
Mutual Wealth business level, with ongoing
oversight at Group level.
4. Expansion in africa
We are looking to expand our business further
into the African continent. This could potentially
increase execution, reputational, legal and
people risk.
The level of investment in new territories is still
relatively small; while nominally more capital has
been allocated to these territories, from an
economic capital perspective they are not yet
material to Emerging Markets. The approach has
been cautious, and volumes of business are low.
We perform due diligence and careful
groundwork before entering new territories
to ensure we fully understand the risk that we
are taking on. Where possible we consider
partnering with local businesses rather than
going in on our own.
5. Old Mutual Bermuda
The residual risk relating to the Bermuda business
remains. However, we have reduced the
exposure through reducing the equity volatility in
the business.
At the start of 2012, the exposures in relation to
Bermuda were our largest single risk to capital
and the only material area which was outside
risk appetite. In March 2012 we put in place an
option-based hedging programme to mitigate
the market risk for the five-year top-ups.
In addition, significantly more policies than
expected have been surrendered at or
shortly after the five-year point.
Where we have existing operations, we monitor
new business levels and required capital for
these businesses in order to identify higher than
expected growth.
The exposure to Old Mutual Bermuda has
substantially reduced and the residual exposure
is now within risk appetite. Although this is no
longer the largest single risk to the Group,
we continue to monitor the market exposure
in the business.
80
Old Mutual plcAnnual Report and Accounts 2012 How we govern our business
In this section, we look at who is on the
Board and explain how we address
governance matters
What
we do
Where we
are going
How we
have
performed
Our risks
Financials
How we govern our business
o
u
r
b
u
s
i
n
e
s
s
H
o
w
w
e
g
o
v
e
r
n
Contents
Board of Directors
Introduction to the Directors’ Report
by the Chairman
Approach to governance
How the Board operates
Directors’ share interests
Directors’ conflicts of interest
Board Committees
Attendance record
Auditors
Control environment and
Group Internal Audit
82
84
85
86
88
89
89
92
93
93
Relations with shareholders
and analysts
AGMs
Directors’ indemnities
Miscellaneous Directors’
Report matters
Going concern
Disclosure of information to the
auditors and governing law
Remuneration Report
94
95
96
96
97
98
99
board of
directors
7
8
9
10
11
12
1
2
3
4
5
6
82
1 Patrick o’sullivan (63) (irish)
M.Sc., B.B.S., F.C.A. (Ireland)
Chairman of the Board since January 2010.
Also chairs the Nomination Committee
Prior relevant experience
Vice Chairman of Zurich Financial Services (2007-2009),
where he had specific responsibility for its international
businesses including those in South Africa. Prior to that,
he had been Group Finance Director and CEO, General
Insurance and Banking, of its UKISA division. He has also
held positions at Bank of America, Goldman Sachs, Financial
Guaranty Insurance Company (a subsidiary of GE Capital),
Barclays/BZW and Eagle Star Insurance Company.
External positions held
Chairman of the Shareholder Executive in the UK,
non-executive director of Man Group plc and Deputy
Governor of the Bank of Ireland.
2 Julian roberts (55) (British) B.A., F.C.A., M.C.T.
Group Chief Executive
Please see Group Executive Committee on page 22 of this
Report for further information.
3 Philip Broadley (52) (British) M.A., F.C.A.
Group Finance Director
Please see Group Executive Committee on page 22 of this
Report for further information.
4 Mike Arnold (65) (British) B.Sc., F.I.A.
Independent non-executive director since September 2009.
Chairman of the Board Risk Committee and a member of the
Group Audit and Nomination Committees
Prior relevant experience
Principal Consulting Actuary and Head of Life practice at the
consulting actuarial firm Milliman (2002 - 2009). Prior to that,
he had been the senior partner at the practice from 1995.
He is a past Member of Council and Vice Chairman of the
Institute of Actuaries, past Chairman of the International
Association of Consulting Actuaries and past member of
the Board of Actuarial Standards.
External positions held
Non-executive director of Financial Information Technology
Limited and Scottish Equitable Policyholders Trust Limited.
5 russell edey (70) (British) F.C.A.
Independent non-executive director since June 2004.
Chairman of the Remuneration Committee and a member
of the Group Audit and Nomination Committees. Having now
served on the Board for nearly nine years, Mr Edey will retire
at the AGM in May 2013
Prior relevant experience
Chair of Anglogold Ashanti Limited (1998-2010). Prior
experience as a member of the boards of a large number
of listed UK companies. His career began in the Finance
Division of the Anglo American Corporation of South Africa
Limited in Johannesburg. He joined Rothschild in 1977 and
was Head of Corporate Finance from 1991 to 1996.
External positions held
Chairman of Avocet Mining Plc and a non-executive director
of a number of companies in the Rothschild Group.
Old Mutual plcAnnual Report and Accounts 2012 6 Alan Gillespie (62) (British) CBE, B.A., M.A., Ph.D.
Senior Independent Director since May 2011, having joined
the Board as an independent non-executive director
in November 2010. Also a member of the Group Audit,
Nomination and Remuneration Committees
Prior relevant experience
Partner at Goldman Sachs New York from 1990, with
responsibility for corporate finance and mergers and
acquisitions in the UK and Ireland. He jointly led the firm’s
financial services practice in Europe and in 1996 established
Goldman Sachs’ presence in South Africa. After retiring from
Goldman Sachs in 1999, he became Chief Executive of
the Commonwealth Development Corporation in the UK.
In 2001 he became Chairman of Ulster Bank, a subsidiary
of Royal Bank of Scotland plc.
External positions held
Senior Independent Director of United Business Media plc and
Chairman of the Economic & Social Research Council and of
the International Finance Facility for Immunization (IFFIm).
7 danuta Gray (54) (British) B.Sc., M.B.A.
Independent non-executive director appointed from 1 March
2013. She will also become a member of the Group Audit,
Nomination and Remuneration Committees
Prior relevant experience
Chairman of Telefónica O2 in Ireland until December 2012,
having previously been its Chief Executive from 2001 to 2010,
and she remains a consultant to Telefónica in Germany. Prior
to that, she was a Senior Vice President for BT Europe in
Germany, where she gained experience in sales, marketing,
customer service and technology and in leading and
changing large businesses. She previously served for seven
years on the board of Irish Life and Permanent plc and was
also a director of Business in the Community.
External positions held
Non-executive director, chairman of the Remuneration
Committee and a member of the Audit Committee of
Aer Lingus plc and also a non-executive director and member
of the Remuneration Committee of Paddy Power PLC.
8 reuel Khoza (62) (south African) Eng. D., M.A.
Non-executive director of the Company since January 2006
and Chairman of Nedbank Group since May 2006. Also a
member of the Board Risk and Nomination Committees
Prior relevant experience
His previous appointments include Chairmanship of Eskom
Holdings Limited and non-executive directorships of Glaxo
Wellcome SA, IBM SA, Vodacom, the JSE, JCI, Standard Bank
Group and Liberty Life.
External positions held
Chairman of Aka Capital, which is 25% owned by Old Mutual
(South Africa). Non-executive director of Nampak Limited,
Protea Hospitality Holdings Limited and Corobrik (Pty)
Limited. Fellow and President of the Institute of Directors of
South Africa.
9 roger Marshall (63) (British) B.Sc. (Econ.), F.C.A.
Independent non-executive director of the Company and
Chairman of the Group Audit Committee since August 2010.
He is also a member of the Board Risk and Nomination
Committees
Prior relevant experience
Former audit partner in PricewaterhouseCoopers, where
he led the audit of a number of major groups, including
Zurich Financial Services and Lloyds TSB.
External positions held
Chairman of the Accounting Council, a Director of the
Financial Reporting Council and a non-executive director
of Genworth Financial’s European insurance companies.
10 Bongani Nqwababa (46) (south African)
B.Acc., C.A., M.B.A.
Independent non-executive director of the Company since
April 2007. Also a member of the Group Audit, Nomination
and Remuneration Committees
Prior relevant experience
Finance Director of the South African electricity utility group,
Eskom Holdings Limited, from 2004. Prior to joining Eskom,
he had been Treasurer and CFO of Shell Southern Africa.
External positions held
Finance Director of Anglo American Platinum Limited since
2009. Chairman of the South African Revenue Services
(Receiver of Revenue) Audit Committee.
11 Nku Nyembezi-Heita (52) (south African)
B.Sc., M.Sc., M.B.A.
Independent non-executive director of the Company since
March 2012. She will become a member of the Board Risk
and Nomination Committees from March 2013
Prior relevant experience
Former non-executive director of Old Mutual Life Assurance
Company (South Africa) Limited (2010-2012), a position she
relinquished upon taking up her role at plc level. Former Chief
Officer of Mergers & Acquisitions for the Vodacom Group
and Chief Executive Officer of Alliance Capital.
External positions held
Chief Executive Officer of ArcelorMittal South Africa since
2008. Non-executive director of the JSE Limited.
12 Lars otterbeck (70) (swedish) Dr. Econ.
Independent non-executive director since November 2006,
also a member of the Board Risk, Nomination and
Remuneration Committees. Following the Group’s disposal of
its Nordic business during 2012, Mr. Otterbeck will retire from
the Board at the AGM in May 2013
Prior relevant experience
Prior to joining the Board, Mr Otterbeck held various senior
business positions in Sweden, including as President and CEO
of the Swedish mutual pension insurance company, Alecta,
from 2000 to 2004.
External positions held
Non-executive director of Skandia Liv.
Further details of the assessment of the individual Board
members’ contribution to the Board and its Committees
during 2012 and of the reasons for shareholders to support
those standing for election or re-election at the 2013 AGM
are contained in the explanatory notes accompanying the
relevant resolutions in the shareholder circular relating to
that meeting.
83
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS
We continue to aim
to meet investors’
ever-increasing
expectations in the
areas of best practice
and governance
84
2012 proved to be a significant year for the Company and its
Board, with major steps being taken to achieve the various
targets that we had announced in 2010. The Board monitored
the progress that was being made against those targets closely
throughout the year, which was the final year of the original
three-year restructuring plan presented to shareholders. Our
particular focus during the first half was on ensuring that the
sale of our Nordic business was completed successfully and
that the proceeds were deployed through a mixture of returns
to shareholders by way of a Special Dividend and repayment
of Group debt.
The Board and the Group Audit Committee continued to
monitor the Group’s financial position, reviewing monthly
financial information and considering the Group’s full-year
and interim results announcements so as to ensure that they
presented an accurate and appropriate picture of the
Group’s affairs. In line with recommendations emanating
from last year’s externally facilitated Board effectiveness
review, we refined the content of the Board’s monthly financial
reports. Attention was paid to ensuring that Board and
Committee members were receiving the right amount and
type of information that would best enable them to obtain
assurance about the state of the Group’s finances, risk
management and culture through a proactive marshalling
of Board and Committee materials.
We also continued to take a close interest in the management
of the run-off of liabilities under the closed book of business
at Old Mutual Bermuda, which we were pleased to note
showed a satisfactory and improving trend.
On the strategic front, we received presentations on our
South African businesses’ plans to expand into the rest
of Africa, on Old Mutual Wealth’s repositioning for the
post-RDR world and on Nedbank’s readiness for Basel III,
among other topics, and we continued to devote a significant
amount of Board time to discussing longer-term strategic
options for the Group as a whole.
The Board again received feedback from the annual
survey of Group culture and values, which helped to show
where improvements had been achieved and where work
still needed to be done. We see this as a crucial tool for
monitoring and, where necessary, initiating change in
the prevailing ethos of our businesses, which is so important
for a customer-focused financial services group like ours.
The Company continues to seek to widen skills and diversity at
Board level and we are pleased that Danuta Gray has joined
us with effect from 1 March 2013.
In the regulatory area, we received further briefings on the
prospective impact on the Group of Solvency II, including
the consequences arising from the likely postponement of
the implementation date for this new solvency regime.
We also regularly reviewed the status of relationships
with our regulators.
Looking forward, I am focused on ensuring that the Board
continues to have the necessary skills and capacity to deal
with the issues that face the Group and that we meet
investors’ ever-increasing expectations in the areas of best
practice and governance.
Patrick O’Sullivan
Chairman
Old Mutual plcAnnual Report and Accounts 2012
What is the Company’s approach
to governance?
Old Mutual views good governance as a vital ingredient
in operating a successful business, so that it can provide
assurance to shareholders, customers and regulators that
the Group’s businesses are being properly managed
and controlled.
Our Group Operating Model is based upon a
‘strategic controller’ model steered from our Head Office.
Its objectives are:
■ To establish clear principles of delegation and escalation
designed to provide appropriate levels of assurance about
the control environment, while retaining flexibility for our
businesses to operate efficiently
■ To set out a clear and comprehensive governance
framework, with appropriate procedures, systems and
controls, facilitating the satisfactory discharge of the
duties and obligations of regulated firms, directors and
employees within the Group
■ To provide a clear articulation of Old Mutual plc’s
expectations (as shareholder) of business unit boards
when exercising their powers as set out in their
respective constitutions
■ To take due account of the regulatory requirement that
boards of regulated entities maintain proper controls
over the affairs of their respective businesses
■ To protect the interests of the Group’s various
stakeholders including its shareholders, creditors,
policyholders and customers.
The governance relationship with the Group’s majority-owned
subsidiary, Nedbank Group Limited, recognises the latter’s
own governance expectations as a separately-listed entity on
the JSE Limited and the fact that it has minority shareholders.
The Company entered into a relationship agreement with
Nedbank Group Limited in 2004 setting out the Company’s
requirements and expectations as its majority shareholder.
The text of that relationship agreement is available on the
Company’s website. Nedbank has also now adopted the
Group Operating Model, subject to certain waivers in
acknowledgement of its separately-listed and regulated
status, which sits alongside that agreement.
As the Company’s primary listing (now known in the UK as a
premium listing) is on the London Stock Exchange, this report
mainly addresses the matters covered by the UK Corporate
Governance Code, but the Company also has regard to
governance expectations in other territories where its shares
are listed. The Company’s major South African subsidiaries
are subject to applicable local governance expectations,
including those contained in King III and, in the case of
Nedbank Group Limited, the Listings Requirements of the
JSE Limited.
Throughout the year ended 31 December 2012 and in the
preparation of this Annual Report and these Accounts, the
Company has complied with the main and supporting
principles and provisions set out in the UK Corporate
Governance Code as described in the following sections of
this Report. The Company’s compliance with UK Corporate
Governance Code provisions C1.1, C2.1, C3.1 to C3.7, and
the statement relating to the going concern basis adopted in
preparing the financial statements set out at the end of this
section of this report, have been reviewed by the Company’s
auditors, KPMG Audit Plc, in accordance with guidance
published by the UK Auditing Practices Board.
Who serves on the Board?
The Old Mutual Board currently has 12 members, two of
whom are executive and 10 of whom are non-executive.
All of the current directors, except for Nku Nyembezi-Heita
(who joined the Board in March 2012) and Danuta Gray
(who joined the Board from 1 March 2013), served throughout
the year ended 31 December 2012. Eva Castillo served as a
non-executive director throughout 2012, but resigned,
because of the burden of other commitments, as a director
and as a member of the Board Risk, Nomination and
Remuneration Committees, on 28 February 2013. Russell Edey
and Lars Otterbeck will both retire from the Board at the end
of the AGM in May 2013, resulting in a continuing
complement of 10 members.
The table below sets out the Board’s membership in
more detail.
Committee memberships (from March 2013)
Group Audit
Committee
Board Risk
Committee
Remuneration
Committee
Nomination
Committee
Role
Name and nationality
Date of original
appointment
Date current
term ends
NED
Russell Edey (UK)
June 2004
May 2013
NED
Reuel Khoza (SA)
Jan 2006
Jan 2014
NED
Lars Otterbeck (Swedish)
Nov 2006
May 2013
NED
NED
CHAIR
NED
SID
NED
NED
CEO
CFO
Bongani Nqwababa
(SA)
Mike Arnold (UK)
Patrick O’Sullivan
(Irish)
Roger Marshall (UK)
Alan Gillespie (UK)
April 2007
April 20131
Sept 2009
Sept 2015
Jan 2010
Aug 2010
Nov 2010
Jan 2016
Aug 2013
Nov 2013
Nku Nyembezi-Heita (SA) March 2012 March 2015
Danuta Gray (UK)
Julian Roberts (UK)
Philip Broadley (UK)
March 2013 March 2016
Aug 2000
Nov 2008
Current
term as
director
3rd
(final year)
3rd
(2nd year)
3rd
(final year)
2nd
2nd
2nd
1st
1st
1st
1st
*
*
*
*
*
* Chair
* Chair
*
*
*
*
*
* Chair
*
*
*
*
1 On 28 February 2013, the Board approved the extension of Bongani Nqwababa’s engagement for a further year from 1 April 2013.
*
*
*
*
*
* Chair
*
*
*
*
*
85
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
Separately from the formal Board meeting schedule, the
Chairman holds meetings with the other non-executive
directors, without any executives being present, to provide
a forum for any issues to be raised. He also conducts an
annual one-to-one performance evaluation of each of the
other non-executive directors, with any resulting action points
being reported to the Nomination Committee.
Informal meetings among the non-executive directors,
without the Chairman or any executive being present, are also
facilitated by the Company. Among the activities carried out
at such meetings is the annual review of the Chairman’s own
performance under the aegis of the Senior Independent
Director, who also obtains such input as he considers
appropriate from the executive directors.
The assignment of responsibilities between the Chairman,
Patrick O’Sullivan, and the Group Chief Executive,
Julian Roberts, is documented so as to ensure that there
is a clear division between the running of the Board and
executive responsibility for running the Company’s business.
The responsibilities of Patrick O’Sullivan as Chairman include
leadership of the Board, ensuring its effectiveness in all aspects
of its role and setting its agenda; ensuring that adequate time
is available for discussion of all agenda items (in particular
strategic issues), ensuring that the directors receive accurate,
timely and clear information; ensuring effective communication
with shareholders; promoting a culture of openness and
debate by facilitating the effective contribution to the Board
of non-executive directors in particular; and ensuring
constructive relationships between the executive and
non-executive directors.
In the absence of exceptional circumstances, non-executive
directors (including the Chairman) serve a maximum of nine
years in office. This maximum period of tenure now operates
on the basis of two three-year terms, followed by up to three
further one-year terms. The renewal of non-executive
directors’ engagements for successive terms is not automatic
and the continued suitability of each non-executive director
is assessed by the Nomination Committee before renewal
of their appointment takes place.
What did the Board do during 2012?
The Chairman’s introduction to this section describes some
of the main matters that were addressed by the Board during
the year. In addition to those and the regular updates on the
Group’s results, the Group Chief Executive’s report on recent
significant developments and major projects around the
Group, and reports from Board committee chairmen, the
following table sets out some more details of the Board’s
other activities at its scheduled meetings during 2012.
What is the Board’s role and how does it operate?
The Board’s role is to exercise stewardship of the Company
within a framework of prudent and effective controls that
enables risk to be assessed and managed. The Board sets
the Company’s strategic aims, reviews whether the necessary
financial and human resources are in place for it to meet its
objectives and monitors management performance. It is kept
informed about major developments affecting the Group
through the Group Chief Executive’s and Group Finance’s
monthly reports and holds regular strategy sessions at
which high-level strategic matters are discussed. The Group
Operating Model sets out matters that are specifically reserved
for Board decision and protocols that govern escalation of
issues to it and delegation of powers from it in a manner that
is designed to ensure clarity about where responsibility for
decision-making lies.
In accordance with the Group Operating Model, the Board
has delegated its executive powers to the Group Chief
Executive, with power to sub-delegate, and also to the
Approvals Committee. In his co-ordination and stewardship
of the Group, the Group Chief Executive is advised by the
Group Executive Committee, a consultative management
committee, whose current members are described elsewhere
in this Annual Report. The Board has also delegated specific
responsibilities for certain matters to Board committees.
The principal Board committees have responsibility for
Nomination, Remuneration, Group Audit and Board Risk
matters, in line with their respective terms of reference.
The Board receives reports from these committees on the
subjects that they have covered. The matters addressed by
the principal Board committees in 2012 are outlined under
the heading “What are the standing Board Committees and
how have they operated during the year?“ below and, for the
Remuneration Committee, in the Remuneration Report.
While the Board currently includes only two executive directors,
all members of the Board have regular contact with the other
senior executive management (including the most senior
executives of the main business units of the Group) through
their periodic participation in Board meetings, other briefing
sessions by the senior executives and Board visits to the
locations where the Group’s main businesses are based. The
Board also receives minutes of the proceedings of the Group
Executive Committee, which help to keep it informed about
the discussions that are taking place between the Group
Chief Executive and the heads of the Group’s main businesses
and of Group central functions such as Risk, Strategy and
Human Resources.
The executive element of the Board is balanced by an
independent group of non-executive directors. The Board
as a whole approves the strategic direction of the Group,
scrutinises the performance of management in meeting
agreed goals and objectives, and monitors the reporting
of performance. Procedures are in place to enable Board
members to satisfy themselves about the integrity of the
Group’s financial information and to ensure that financial
controls and systems of risk management are robust and
sustainable. Non-executive directors on the Remuneration
Committee are responsible for determining appropriate
levels of remuneration for the executive directors, other
members of the Group Executive Committee and certain
other senior members of staff. Members of the Nomination
Committee have a primary role in recommending
the appointment and, where necessary, removal of
executive directors.
86
Old Mutual plcAnnual Report and Accounts 2012 Date of meeting
Location
Topics covered
January 2012
OMSA’s and Nedbank’s
offices in Sandton,
Johannesburg
■ Pre-year-end review of results and the Annual Report and Accounts for 2011
■ Update on the disposal of our former Nordic business and approval of the related shareholder circular
■ Update on strategy and progress against Group targets
■ Review of the preliminary results for 2011
■ Approval of the Annual Report and Accounts for 2011
■ Recommendation of the final dividend for 2011
March 2012
London
■ Feedback from the 2011 Board effectiveness review
■ Approval of the Q1 Interim Management Statement
■ Update on Group strategy
May 2012
London
■ Presentations on the Group’s Long-Term Savings (LTS) and LTS asset management businesses
■ Briefing on the use of risk management tools and data in strategic decision-making
July 2012
London
■ Strategy discussions
August 2012
September 2012
November 2012
Old Mutual Wealth's
offices in Southampton
■ Review of the interim results
■ Declaration of the interim dividend for 2012
■ Presentation on Old Mutual Wealth’s European operations
London
■ Board briefing on the Internal Model for Solvency II
London and by telephone
■ Approval of the Q3 Interim Management Statement
■ Review and approval of the Group business plan for 2013-15
■ Discussion of Group strategy
■ Presentations by OMSA, Nedbank and Mutual & Federal on their business and strategy plans for
December 2012
OMSA’s and Nedbank’s
offices in Cape Town
2013-15
■ Presentation by Nedbank on its readiness for Basel III
How are people selected to join the Board?
Plans for refreshing and renewing the Board’s composition
are managed by the Nomination Committee so as to ensure
that changes take place without undue disruption and that
there is an appropriate balance of experience and length
of service. This Committee also considers, in making
recommendations, the independence of candidates and their
suitability and willingness to serve on other committees of the
Board. The current Board composition is considered by the
Nomination Committee to be suitable for the requirements
of the Group’s business. However, such matters continue to
be kept under active review, having regard to scheduled
retirements of non-executive directors and the Group’s
future strategy.
The terms and conditions of engagement of each of the
non-executive directors are available on the Company’s
website. These include details of the expected time commitment
involved (which each of the non-executive directors has
accepted). Other significant commitments of potential
appointees are considered by the Nomination Committee
as part of the selection process and are disclosed to the
Board when recommendation of an appointment is submitted.
Non-executive directors are also required to inform the
Board of any subsequent changes to such commitments,
which must be pre-cleared with the Chairman if material.
87
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
of the Board carried out by the Group HR Director. The results
were collated and reported back to a session of the Nomination
Committee (which all other members of the Board were also
invited to attend) at the end of January 2013.
The review concluded that:
■ The Board and its committees had operated satisfactorily
during the year, with a generally appropriate mix of skills
represented on each of them and good levels of
information and discussion, well facilitated by their
respective chairmen
■ The Company, in seeking new non-executive directors to
join the Board, should consider people with additive
experience in areas such as IT, the retail sector and doing
business in the rest of Africa
■ Efforts should be made to expand the Board’s interaction
with executive management further down the structure in
order to help with evaluating succession planning for
senior roles.
Who will be standing for re-election at this
year’s AGM?
All of the directors (save for the two who are retiring) will
stand for election or re-election at the 2013 AGM. The Board
recommends that they each be elected or re-elected as
directors at the AGM. Biographical details of all of the directors
are contained in the Board of Directors section of this Annual
Report and further details of the basis upon which the Board
has assessed the performance, and recommends the election
or re-election of the directors concerned are set out in the
explanatory notes in the AGM circular.
Are directors required to hold shares
in the Company and what are their
current interests?
The Remuneration Committee has established guidelines
on shareholdings by executive directors of the Company.
Under these, the Group Chief Executive is expected to build
up a holding of shares in the Company equal in value to at
least 200% of his annual base salary within five years of
appointment; the equivalent figure for other executive directors
is 150% of their annual base salary. Both Julian Roberts
and Philip Broadley are currently fully compliant with these
guidelines. The Board has considered whether to adopt
a shareholding requirement for non-executive directors,
but does not consider this to be appropriate.
Details of the directors’ interests (including interests of their
connected persons) in the share capital of the Company
and its quoted subsidiary, Nedbank Group Limited, at the
beginning and end of the year under review are set out in
the following tables, while their interests in share options and
restricted share awards are described in the section of the
Remuneration Report entitled ‘Directors’ interests under
employee share plans’. There have been no changes to any
of the interests in the first table below between 31 December
2012 and 1 March 2013. Danuta Gray does not currently
have any interests in any of the Group’s listed shares.
What is the Company’s approach to
gender diversity?
In September 2011, we issued a statement in response to the
Davies Report on Women on Boards in which we set a target
of increasing female representation on the Board to at least
two members by the end of 2013 and to at least three members
by the end of 2015. The Company has already appointed
Eva Castillo in February 2011, Nku Nyembezi-Heita in
March 2012, and Danuta Gray from March 2013, although
Eva Castillo has now resigned from the Board (from the end
of February 2013) because of her other commitments. Based
upon our Board as it will be after this year’s AGM (assuming
no further changes prior to then), we would have two women
out of ten continuing directors, ie 20% female representation.
At senior executive levels, women now hold approximately
15% of roles, slightly up on previous years, and make up 20%
of the executive succession pipeline. We continue to take
active steps through a variety of initiatives to encourage
female members of staff around the Group to progress to
more senior positions. These include our participation in the
FTSE100 Cross-Company Mentoring Programme, in which
our Chairman mentors a senior woman from another
organisation and a CEO from another company mentors one
of our female executives. We provide sponsorships to attend
women’s leadership programmes at premier business schools
such as INSEAD, have an active Women’s Network in the UK
and have other related initiatives in other parts of the Group.
Are the non-executive directors independent?
Eight of the nine current non-executive directors other than
the Chairman (Mike Arnold, Russell Edey, Alan Gillespie,
Danuta Gray, Roger Marshall, Bongani Nqwababa,
Nku Nyembezi-Heita and Lars Otterbeck) are considered
by the Board to be independent within the criteria set out in
the UK Corporate Governance Code, ie they are independent
in character and judgement and have no relationships or
circumstances which are likely to affect, or could appear to
affect, their judgement. The other non-executive director,
Reuel Khoza, is not considered independent because of his
chairmanship of the Group’s majority-owned subsidiary,
Nedbank Group Limited, and the business relationships
between Aka Capital, in which he owns a stake, and Nedbank.
Who is your Senior Independent Director?
Alan Gillespie has been the Senior Independent Director
since May 2011. The Senior Independent Director is available
to shareholders if they have concerns that are unresolved
after contact through the normal channels of the Chairman,
Group Chief Executive or Group Finance Director or where
such contact would not be appropriate. The Senior
Independent Director’s contact details can be obtained from
the Group Company Secretary: martin.murray@omg.co.uk.
How is the Board’s performance reviewed?
The Board conducts a review of its performance on an
annual basis. These reviews are now carried out by an
external expert at least every three years in line with the UK
Corporate Governance Code. The review is designed to
address the balance of skills, experience, independence and
knowledge of the Group’s businesses on the Board, its diversity
(including gender), how the Board works together as a unit, and
other factors relevant to its effectiveness.
Following the externally facilitated review that took place
through IDDAS in 2011, the review for 2012 was conducted
through an online questionnaire whose contents were
co-ordinated with the prior year’s process, supplemented by
a series of thorough one-to-one interviews with each member
88
Old Mutual plcAnnual Report and Accounts 2012 At 31 December 2012
Mike Arnold
Philip Broadley
Russell Edey
Alan Gillespie
Reuel Khoza
Roger Marshall
Bongani Nqwababa
Nku Nyembezi-Heita
Patrick O’Sullivan
Lars Otterbeck
Julian Roberts
Former director
Eva Castillo (resigned on 28 February 2013)
At 1 January 2012 (or date of appointment as a director, if later)
Mike Arnold
Philip Broadley
Russell Edey
Alan Gillespie
Reuel Khoza
Roger Marshall
Bongani Nqwababa
Nku Nyembezi-Heita (appointed from 9 March 2012)
Patrick O’Sullivan
Lars Otterbeck
Julian Roberts
Former director
Eva Castillo
Old Mutual plc
Number of ordinary shares
of 113⁄ 7p each1
Nedbank Group Limited
Number of shares
11,134
513,4342
21,875
–
–
45,000
–
–
91,319
–
1,385,8892
–
–
2,604
–
14,774
–
–
–
–
–
–
–
–
Old Mutual plc
Number of ordinary shares
of 10p each
Nedbank Group Limited
Number of shares
12,725
412,1782
25,000
–
–
40,000
–
–
104,365
–
1,128,6332
–
–
–
2,604
–
3,174
–
–
–
–
–
–
1 The numbers for 31 December 2012 reflect the 7-for-8 share consolidation that took place in April 2012.
2 These figures do not include rights to restricted shares that have not yet vested, which are described in the Remuneration Report.
How are directors’ conflicts of
interest managed?
Processes are in place for any potential conflicts of interest
to be disclosed and for directors to avoid participation in any
decisions where they may have any such conflict or potential
conflict. The Company’s procedures for dealing with
directors’ conflicts of interest continued to operate effectively
during 2012.
No director had a material interest in any significant contract
with the Company or any of its subsidiaries during the year.
Additional details of various non-material transactions
between the directors and the Group are reported on an
aggregated basis, along with other transactions by senior
managers of the Group, in Note G3 to the Accounts.
The executive directors are permitted to hold and retain
for their own benefit fees from one external (non-Group)
non-executive directorship (but not a chairmanship) of another
listed company, subject to prior clearance by the Board and the
directorship concerned not being in conflict or potential conflict
with any of the Group’s businesses. Neither Julian Roberts nor
Philip Broadley currently holds any external non-executive
directorships of other publicly quoted companies.
What are the standing Board Committees
and how have they operated during
the year?
The Board has a number of committees to which various
matters are delegated in accordance with their respective
terms of reference. The Board also establishes committees on
an ad hoc basis to deal with particular matters. In doing so,
it specifies a remit, quorum and appropriate mix of executive
and non-executive participation. Further information on the
principal standing committees of the Board is set out on the
following pages.
89
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business
DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
Group Audit Committee
Members and dates of appointment to the
committee (or its predecessor committee, the
Group Audit and Risk Committee): Roger Marshall
(Chairman) (2010), Mike Arnold (2009), Russell Edey
(2004), Alan Gillespie (2010), Bongani Nqwababa
(2007). Danuta Gray has joined from March 2013.
Secretary and date of appointment:
Martin Murray (1999).
All members of the Group Audit Committee are independent
non-executive directors. The chairman, Roger Marshall, is a
chartered accountant with a wide range of recent and current
relevant financial experience. All members of this committee
are expected to be financially literate and to have relevant
financial experience.
Roger Marshall has submitted the following report on behalf
of the Group Audit Committee.
The committee met eight times during 2012. The increased
number of meetings, when compared to the prior year, did
not reflect greater issues with the Group’s results, but was
rather intended to enable the Committee to review the
preliminary results for 2011 and interim results for 2012
earlier in the process, with a confirmatory meeting following
closer to their date of release.
The main matters addressed by the committee included:
■ Significant accounting and actuarial issues affecting the
IFRS and MCEV financial statements. The committee
reviewed the accounting policies adopted by the Group
and considered the approach to, and valuation of, assets
and liabilities, including the key actuarial assumptions
underpinning insurance liabilities. The committee considers
that the most significant areas of judgement in preparing
the 2012 accounts were:
— The accounting treatment of the disposal of
Skandia Nordic
— Actuarial assumptions relating to mortality at
Old Mutual South Africa
— The appropriate level of tax provisions
— Loan loss provisions at Nedbank and
Old Mutual Finance
— Impairment of the carrying value of goodwill (see
Note F1 to the Accounts). The committee reviewed the
assumptions used to justify no impairment to goodwill
this year and was comfortable with them. In particular,
the committee reviewed the carrying value of goodwill
and other intangibles relating to the Old Mutual Wealth
businesses in continental Europe, now that certain
countries are operating a closed book model. The
committee agreed that the projected future cash flows
from these businesses supported the carrying value of
these intangibles, even though the carrying value would
be unlikely to be realised on the open market given
current market conditions.
— The provision for Bermuda guarantees (see Note A3
to the Accounts). The committee has reviewed, and is
comfortable with, the process for determining that
provision, which reflects the surrender behaviour at
those five-year anniversary dates that have fallen due so
far of customers holding policies that contain potentially
onerous guarantees. The eventual liability under policies
containing such guarantees will depend on future events,
most significantly market developments, policyholder
behaviour and the level of hedging undertaken.
Note A3 to the Accounts also highlights the range
of possible outcomes.
■ Reports received from the internal audit function, including
the results of key audits and other significant findings
relating to the Group’s control environment, and the
adequacy of management’s responses and the timeliness
of resolution. The committee also reviewed Group Internal
Audit’s response to an externally facilitated effectiveness
exercise and endorsed its plans for adapting its future
structure and working methodologies in response to this.
■ Reports by the Risk Management and Compliance functions.
■ The operation of the Group’s external audit, including:
audit plans for the year, key audit risks identified by external
audit, changes in key external audit staff, arrangements
for day-to-day management of the audit relationship, the
auditors’ arrangements to identify, report and manage
any conflicts of interest, the nature and overall extent of
non-audit services provided by the external auditors, the
external auditors’ engagement letter for the year and fee
proposal, and any major issues that arose during the course
of the audit and their resolution. As in prior years, the
committee received an evaluation of the auditors’
effectiveness after the audit for 2011 had been completed,
with input from the business units as well as from
stakeholders at Old Mutual plc itself.
■ Actions taken to resolve control risks of which the
committee became aware, including progress with the
Financial Controls Initiative. This included receiving reports
from subsidiary management as appropriate.
■ Tax, litigation and contingent liabilities affecting the Group.
In addition, I sit on the Board Risk Committee, while the
chairman of that committee also sits on the Group Audit
committee, so that the activities of the two committees can be
closely co-ordinated and, if appropriate, the two committees
can meet in joint session to discuss matters that are of common
interest. I also liaise as appropriate with the chairman of the
Remuneration Committee so as to ensure that I am able to
draw to his attention any aspects of the Group’s results or
controls that the Group Audit Committee feels ought to be
taken into account in setting levels of remuneration for the
executive directors and other senior executives.
The committee also reviewed the Group’s whistle-blowing
arrangements. These enable employees of the Group and
others to report complaints on accounting, risk issues, internal
controls, auditing issues and related matters. They can do this
in confidence, using a dedicated hotline operated by an
independent firm of accountants. Any reports are investigated
and escalated to the committee as appropriate. Efforts are
made to educate staff around the Group about the existence
of the whistle-blowing facility and to help them detect the
signs of possible fraudulent or improper activity.
90
Old Mutual plcAnnual Report and Accounts 2012 The section later in this Report headed “Who are the
Company’s auditors and how much are they paid?” contains
information on our policy on auditor independence and
non-audit fees and the committee’s recommendation that
KPMG Audit Plc should be reappointed as the Company’s
auditors for 2013.
As a committee, we hold private meetings with the external
auditors once a year (or more often, if requested by the
auditors) to review key issues. As chairman of the committee,
I also have regular interaction with the external auditors and
the Group Internal Audit Director, as well as with the chairmen
of subsidiary audit committees and the Group Finance
Director, and I have a continuing programme of visits to the
Group’s major subsidiaries arranged, so that I can remain
abreast of issues as they arise during the year.
The committee can confirm that it received sufficient, reliable
and timely information from management during the year to
enable it to fulfil its responsibilities.
Board Risk Committee
Members and dates of appointment to the
committee: Mike Arnold (Chairman) (2010), Philip
Broadley (2010), Reuel Khoza (2010), Roger Marshall
(2010), Lars Otterbeck (2010). Other member, until
the end of February 2013: Eva Castillo. Nku
Nyembezi-Heita has joined from March 2013.
Secretary: Colin Campbell succeeded Martin Murray
as Secretary to the committee in August 2012.
Mike Arnold has submitted the following report on behalf of
the Board Risk Committee.
The committee met eight times during the year. The Chief Risk
Officer and the Group Internal Audit Director attended each
meeting and the Group Chief Actuary attended seven of the
meetings. The external auditors were also invited to attend
seven of the meetings.
The committee received a report at each of its meetings
during 2012 from the Chief Risk Officer in which any changes
to the Group’s risk profile were identified and discussed.
We also reviewed the risk appetite metrics operated by the
Group and recommended to the Board some changes to
the criteria to be used by the business units for their business
planning over the three-year period 2013 to 2015.
During the year, the committee devoted significant time to
the financial risks in relation to Old Mutual Bermuda and the
hedging and other mitigating actions taken to reduce these
risks. The committee also reviewed the stress and scenario
testing used to support the Board’s decisions on capital
management in the context of the Special Dividend and the
repayment of debt.
In addition, during our meetings in 2012, we focused on:
■ The Group’s preparations for Solvency II
■ The adoption of a revised Group-wide internal capital
model which takes account of the Solvency II requirements
as they currently stand, recognising that there are continued
delays in reaching final agreement on aspects of
Solvency II across Europe
■ Assessments of the Group’s capital and solvency position
■ The content and suitability of the Group’s suite of
risk policies
■ Regulatory risks arising as a result of business activities,
in particular the Group’s regulatory environment and
compliance status
■ Stress and scenario testing, focusing on particular
economic and business scenarios and their potential
impact on the Group’s finances
■ Risks arising from material corporate transactions being
considered by the Group.
In addition to its regular meetings, the committee held two
full-day workshops to enable discussions to take place on
a wide range of issues relating to risk management within
the Group.
In connection with the finalisation of the Group’s annual
results, the committee submitted a report prepared by the
Chief Risk Officer to the Remuneration Committee commenting
on management’s observance during the year of the risk
appetite metrics agreed by the Board.
The committee also undertook a review of its terms
of reference.
As Roger Marshall has indicated in his report on the activities
of the Group Audit Committee, I also sit on the Group Audit
Committee and am therefore able to raise matters at either
committee as appropriate.
During 2012, either Roger Marshall or I personally attended
the risk and audit committees of each of the major
subsidiaries of the Group and we have ongoing dialogue
with the independent directors who chair those subsidiaries’
committees. I shall continue to attend these meetings in 2013
in order to remain close to any major risk issues that may
arise during the coming year.
Now that the Group’s risk framework has been established,
we intend to evolve the operation of the committee further
during 2013. The committee will revert to a more normal level
of four meetings annually, but I will receive more frequent
updates through my meetings with the Chief Risk Officer
and the Group Chief Actuary.
Nomination Committee
Members and dates of appointment to the
committee: Patrick O’Sullivan (Chairman) (2010),
Mike Arnold (2010), Russell Edey (2005),
Alan Gillespie (2010), Reuel Khoza (2010),
Roger Marshall (2010), Bongani Nqwababa (2010),
Lars Otterbeck (2010), Julian Roberts (2008).
Other member, until the end of February 2013:
Eva Castillo (2011). Danuta Gray and Nku
Nyembezi-Heita have joined from March 2013.
Secretary and date of appointment:
Martin Murray (1999).
The Nomination Committee makes recommendations to the
Board in relation to the appointment of directors, the structure
of the Board and membership of the Board’s main standing
committees. It also reviews development and succession plans
for the most senior executive management of the Group and
certain appointments to the boards and standing committees
of principal subsidiaries in line with the Group Operating
Model. It is chaired by the Chairman of the Board, Patrick
O’Sullivan, and a majority of its members are independent
non-executive directors.
The committee seeks to ensure that its process for identifying
candidates for recommendation to the Board as new
directors is formal, rigorous and transparent. Vacancies
generally arise in the context of either planned renewal of the
Board, replacing directors who are due to retire, or adjusting
the Board’s balance of knowledge, skills, independence or
diversity. In identifying candidates, appropriate regard is
91
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
paid to ensuring that they will have sufficient time available in
the light of their other commitments to discharge their duties
as directors of the Company.
In light of the fact that two of the existing non-executive
directors (Russell Edey and Lars Otterbeck) would be stepping
down at the AGM in May 2013, the Committee agreed at its
meeting in August 2012 to start a process for identifying
potential replacements, with the search to focus on
candidates with a proven track record as a chief executive
and strong general management experience. As the Group’s
strategy is reliant on strong IT systems, the ability to interact
with customers online and a strong retail customer focus,
experience in the IT and/or retail areas were deemed
additional desirable skills.
MWM Consulting (an independent executive search and
board advisory consulting firm) was appointed to lead the
search, building on work that they had completed previously
for the Board. The search commenced in earnest in
September 2012, with submission of a long list, which was
subsequently reduced to a shortlist of six candidates who
were selected for interview.
Danuta Gray was deemed the most suitable candidate and
it was agreed that she should attend the Board meeting
in December, when she could meet the remaining Board
members and observe the Board and committee meetings.
Her candidature was duly endorsed and her appointment
confirmed in February 2013, effective from 1 March 2013.
It was also agreed that she would become a member of the
Group Audit, Nomination and Remuneration Committees.
Remuneration Committee
Members and dates of appointment to the
committee: Russell Edey (Chairman) (2007),
Alan Gillespie (2010), Bongani Nqwababa (2010),
Lars Otterbeck (2010). Other member, until the end
of February 2013: Eva Castillo (2011). Danuta Gray
has joined from March 2013. Secretary:
Paul Forsythe succeeded Martin Murray as
Secretary to the committee in August 2012.
A full description of the role of the Remuneration Committee
and of its activities during 2012 is contained in the
Remuneration Report.
Other committees
There are a number of executive committees which assist the
Group Chief Executive with the day-to-day management of
the Group. These include the Group Executive Committee
mentioned earlier in this report, the Group Executive Risk
Committee, whose responsibilities are described in the Risk
and Capital Management report earlier in this document;
and the Group Capital Management Committee, whose role
is, among other things, to agree capital allocations within
certain limits (or make recommendations to the Board
regarding any allocations beyond such limits) and to approve
the capital plan of the Group as part of the annual business-
planning process.
What was the Board’s attendance record
during 2012?
The table below sets out the number of meetings held and
individual directors’ attendance at meetings of the Board
and its principal committees (based on membership of those
committees, rather than attendance as an invitee) during 2012.
Attendance record
Number of meetings held
Mike Arnold1
Philip Broadley2
Russell Edey
Alan Gillespie
Reuel Khoza
Roger Marshall
Bongani Nqwababa3
Nku Nyembezi-Heita4
Patrick O’Sullivan
Lars Otterbeck
Julian Roberts
Former director
Eva Castillo5
Board
(scheduled
and ad hoc)
11
11/11
10/11
11/11
10/11
11/11
10/11
10/11
6/7
11/11
10/11
11/11
9/11
Group Audit
Committee
Board Risk
Committee
Remuneration
Committee
Nomination
Committee
8
8/8
–
8/8
8/8
–
8/8
6/8
–
–
–
–
–
8
8/8
7/8
–
–
8/8
8/8
–
–
–
8/8
–
5/8
5
–
–
5/5
5/5
–
–
3/5
–
–
5/5
–
4/5
6
5/6
–
6/6
6/6
6/6
6/6
5/6
–
6/6
6/6
6/6
4/6
1 Mike Arnold missed one Nomination Committee meeting because of a close family illness.
2 Philip Broadley missed one Board and one Board Risk Committee meeting because of a close family bereavement.
3 Bongani Nqwababa missed a number of Board and Committee meetings during 2012 because of conflicting executive commitments in his role as Finance Director of
Anglo American Platinum Limited.
4 Nku Nyembezi-Heita missed one Board meeting during 2012 because of conflicting executive commitments in her role as Chief Executive of ArcellorMittal South Africa.
5
Eva Castillo missed a number of Board and Committee meetings towards the end of 2012 because of conflicting executive commitments in her new role as Chairman and
Chief Executive Officer of Telefónica Europe. These other commitments led to her resigning from the Board with effect from 28 February 2013.
92
Old Mutual plcAnnual Report and Accounts 2012 Who are the Company’s auditors and how
much are they paid?
KPMG Audit Plc have been the Company’s auditors since the
Company was originally listed in 1999. Arrangements have
been made, in conjunction with KPMG Audit Plc, for
appropriate audit director rotation in accordance with the
requirements of the UK Auditing Practices Board. The current
audit engagement director in the UK, Philip Smart, assumed
this role in April 2011.
The Group Audit Committee regularly keeps under review the
question of whether to put the Company’s audit engagement
out to tender and takes into account the results of an internal
report on satisfaction with the prior year’s audit processes, as
well as benchmarking data, in doing this. The Company has
not entered into any contractual restriction preventing it from
considering a change of auditors. Based upon a review of
and feedback from the 2011 audit, the Group Audit Committee
remains satisfied with KPMG Audit Plc’s performance and did
not feel it was necessary or appropriate to consider a tender
for the 2012 or 2013 audit engagement.
During the year ended 31 December 2012, fees paid by
the Group to KPMG Audit Plc, the Group’s auditors, and
its associates totalled £12.4 million for audit services
(2011: £13.7 million) and £5.1 million for tax, assurance
and other non-audit services (2011: £3.4 million). In addition
to the above, Nedbank Group paid a further £4.2 million
(2011: £4.4 million) to Deloitte in respect of joint
audit arrangements.
Detailed guidelines have been approved by the Group Audit
Committee as part of the Group’s policy on non-audit
services and a summary of the applicable provisions can be
found in the Corporate Governance section of our website.
KPMG Audit Plc have expressed their willingness to continue
in office as auditors to the Company and, following a
recommendation by the Group Audit Committee to the
Board, a resolution proposing their reappointment will
be put to the AGM in May 2013.
What is the Company’s internal
control environment?
An ongoing process for identifying, evaluating and managing
the significant risks faced by the Group has been in place for
the year ended 31 December 2012 and up to the date of
approval of this Report. The process accords with the Turnbull
guidance set out in ‘Internal Control: Revised Guidance for
Directors on the Combined Code’ (the Combined Code
being the previous version of what is now the UK Corporate
Governance Code) and is regularly reviewed by the Board.
How is internal control monitored and reviewed?
The Board has overall responsibility for the Group’s system of
internal control and for reviewing its effectiveness, while the
implementation of internal control systems is the responsibility
of management. Executive management has implemented
an internal control system designed to help ensure:
■ The effective and efficient operation of the Group and its
business units by enabling management to respond
appropriately to significant risks to achieving the Group’s
business objectives
■ The safeguarding of assets from inappropriate use or from
loss and fraud and ensuring that liabilities are identified
and managed
■ The quality of internal and external reporting
■ Compliance with applicable laws and regulations,
and with internal policies on the conduct of business.
The system of internal control is designed to manage, rather
than eliminate, the risk of failure to achieve the Group’s
business objectives, and can only provide reasonable, and
not absolute, assurance against material misstatement or loss.
The Group’s actions to review the effectiveness of the system
of internal control include:
■ An annual review of the risk assessment procedures,
control environment considerations, information and
communication and monitoring procedures at Group
level and within each business unit. This review covers all
material controls, including financial, operational and
compliance controls and the risk management systems
■ A certification process, under which all business units are
required to confirm that they have undertaken risk
management in accordance with the Group risk framework,
that they have reviewed the effectiveness of the system of
internal controls, that internal policies have been complied
with and that no significant risks or issues are known which
have not been reported in accordance with policy
■ Regular reviews of the effectiveness of the system of
internal control by the Group Audit Committee, which
receives reports from Group Internal Audit. The committee
also receives reports from the external auditors, KPMG
Audit Plc, which include details of significant internal
control matters that they have identified during the course
of their work.
These activities are in addition to the regular risk
management activities which are performed on an ongoing
basis (as described in more detail in the Risk and Capital
Management section elsewhere in this document).
The certification process described above does not apply to
certain joint ventures where the Group does not exercise full
management control. In these cases, Old Mutual monitors
the internal control environment and the potential impact
on the Group through representation on the board of the
entity concerned.
The Board reviewed the effectiveness of the system of internal
control during and at the end of the year. Our annual internal
control assessment has not highlighted any material failings.
We remain committed to having a robust internal control
environment across the Group.
What steps are you taking to monitor the quality
of the Group’s financial controls?
In order to improve the quality of the Group’s financial
reporting controls, the Board launched a Financial Controls
Initiative in 2009. This initiative has implemented and
embedded a Group-wide framework of financial controls.
Management assessed the effectiveness of this framework
at 31 December 2012, based on the criteria described in
‘Internal Control – Integrated Framework’ issued by the
Committee of Sponsoring Organizations of Treadway
Commission, and concluded that it was effective.
Management has reported its progress in implementing this
framework to the Group Audit Committee at regular intervals
since 2009, and that committee has supported the Board
in concluding that it can rely upon the operation of these
controls as part of its review of internal control effectiveness
referred to above.
93
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
The Company has a small, dedicated IR team based in
South Africa and London which runs the Group’s international
IR programmes. The team consists of experienced capital
market professionals as well as finance professionals who
have transferred from other parts of Old Mutual. The team
works closely with the media relations, responsible business
and public affairs teams of the Group and businesses units,
and reports to the Director of External Communications.
Old Mutual’s investor base is very diversified in terms of both
investor style and geographic location and the Company has
over 400,000 retail shareholders.
The focus of our IR strategy during the year has been to
improve dialogue with investors and sell-side analysts,
providing them with briefings and educational support, so as
to enable them to obtain a better understanding of the
Group’s operations.
2012
% shareholding
10.29
US (including Canada)
17.00
UK
South Africa institutional 32.73
South Africa retail, policy
and BEE holders
Europe and
Rest of the World
Miscellaneous
20.67
5.80
13.51
2011
10.69
US (including Canada)
18.39
UK
South Africa institutional 33.69
South Africa retail, policy
and BEE holders
Europe and
Rest of the World
Miscellaneous
18.53
4.28
14.42
During 2012, we continued to target smaller institutional
investors and those who manage funds for high net worth
retail clients and charities in both Europe and South Africa
with a view to further diversifying the Company’s shareholder
base. We also increased our communication and engagement
with the investment community, attending 11 investment
conferences during the year, in both Europe and South Africa.
The Company conducted a number of investor presentations
during the year for investors willing to travel to London, Cape
Town and Johannesburg. The most extensive of these was a
whole-day session on the Old Mutual Wealth business in
London, which was also webcast live.
Educating international investors on the Group’s operations
in South Africa and in the rest of Africa has been an area
of significant focus in the last three years. To facilitate this,
we have organised a number of visits for investors to our
South African operations. We expect to continue this in 2013.
This educational process also involves educating buy-side
investors in South Africa on the Group’s international
operations and the operational environment in these markets.
What is the role of Group Internal Audit?
Group Internal Audit (GIA) is responsible for providing
independent, objective assurance on the adequacy and
effectiveness of Old Mutual’s systems of governance, risk
management and internal control to the Board and executive
management and, in doing so, helps enhance the controls
culture within the Group. The work of GIA is focused on the
areas of greatest risk, both current and emerging, to Old
Mutual as determined by a comprehensive, risk-based
planning process. The Group Audit Committee approves the
annual internal audit plan and any subsequent material
amendments to it and also satisfies itself that GIA has
adequate resources to discharge its function (which the Board
is able to confirm is the case for 2012-13).
There are internal audit teams in each of our major
businesses. The heads of internal audit in the Group’s
wholly-owned subsidiaries report directly to the Group
Internal Audit Director (GIAD). The GIAD reports functionally
to the Chairman of the Group Audit Committee and
administratively to the Group Finance Director. The GIAD
attends all meetings of the Group Audit Committee, and has
unrestricted access to the Group Chief Executive and to the
Chairman of the Board, as well as open invitations to attend
any meetings of the business unit Audit Committees, the Board
Risk Committee and the Group Executive Risk Committee.
Internal audit teams across Old Mutual use a single audit
methodology which meets the standards set by the Institute
of Internal Auditors. Issues raised by internal audit during the
course of its work are discussed with management, who are
responsible for implementing agreed actions to address the
issues identified within an appropriate and agreed timeframe.
Formal reports are submitted by the GIAD to each meeting
of the Group Audit Committee, summarising the results of
internal audit activity, management’s progress in addressing
issues and other significant matters.
An assessment of the effectiveness of GIA is carried out
periodically by external advisers. The most recent assessment
was carried out in the second half of 2012 and concluded that
GIA was fit for purpose in meeting the current assurance
needs of the Group.
How does the Company conduct its
relations with shareholders and analysts?
The Company gives high priority to regular, clear and direct
communication with its shareholders, institutional investors
and sell-side analysts by means of a proactive Investor
Relations (IR) programme. The programme aims to facilitate
communication with the global investment community, in both
the equity and debt spheres, and to keep investors updated
on the Company’s performance in accordance with the UK
Listing, Prospectus and Disclosure and Transparency Rules.
The IR team also participates in programmes to identify best
international IR practice and to promote such practice
actively to its investor base.
94
Old Mutual plcAnnual Report and Accounts 2012 The IR team also supported the execution of the Group’s
corporate actions, including most importantly the sale of the
Group’s Nordic business and the resulting Special Dividend
paid to shareholders.
Currently 18 sell-side analysts from Europe and South Africa
actively publish research on the Company. Sell-side analysts
are encouraged to cover the Company to provide their
opinion to investors on the Group’s valuation, its performance
and the business environment in which it operates, and also to
make meaningful comparisons with peers. During the year,
two new research analysts initiated coverage on the stock,
one based in the UK and one with dual coverage from the
UK and South Africa.
The Chairman makes contact with major investors and meets
them as required. The Senior Independent Director is also
available for interaction with shareholders.
The Board is updated regularly by the IR team on issues
arising from communications with the investment community.
In addition to this, independent surveys are commissioned
regularly to provide the Board with the views of major
investors on the Company’s management and performance.
Copies of all investor presentations and, where appropriate,
transcripts are posted on the Company’s website so that they
are accessible to shareholders generally.
When are Annual General Meetings
(AGMs) held?
The Board uses the AGM, which is held at the Company’s
head office in London in May each year, to comment on the
Group’s trading performance during the first quarter.
Shareholders also have the opportunity to ask questions of
the Board. The AGM is webcast and a record of the
proceedings is also made available on the Company’s
website shortly after the end of the meeting. All items of
formal business at the AGM are conducted on a poll,
rather than by a show of hands. The Company’s registrars,
Computershare Investor Services, ensure that all validly
submitted proxy votes are counted, and a senior member of
Computershare’s staff acts as scrutineer to ensure that votes
cast are properly received and recorded.
Each substantially separate issue at the AGM is dealt with by
a separate resolution and the business of the AGM always
includes a resolution relating to the receipt and adoption of
the Report and Accounts. The chairmen of the Group Audit,
Board Risk, Remuneration and Nomination Committees are
available at the AGM to answer any questions on the matters
covered by those committees.
The notice of AGM is sent out to those shareholders who have
elected or are entitled to receive physical documents in time
to arrive in the ordinary course of the post at least 20 working
days before the date of the meeting.
The following are the major IR educational events that
we have organised over the last four years:
November 2012
Old Mutual Wealth roadshow
(in South Africa)
November 2012
OMEM roadshow in London
October 2012
Investor field trip to South Africa
October 2012
Investor presentation on
Old Mutual Wealth in London
May 2012
October 2011
August 2011
July 2011
April 2011
October 2010
September 2010
Presentation to investors and analysts
on Old Mutual Asset Management
OMIGSA presentation on alternative
asset classes and panel discussion
Emerging Markets presentations
to investors
Roadshow on Old Mutual Wealth
(in South Africa)
Presentation to investors on
Emerging Markets
Long-Term Savings Showcase
(London + webcast)
SA Finance Minister and
Minister of Mineral Resources
presentation (London)
November 2009
Nedbank showcase
(London + webcast)
June 2009
Presentation on the outlook for
South Africa’s political and economic
landscape (London + dial-in)
May 2009
Skandia UK showcase (London
and Johannesburg)
The table below shows the five-year track record of improving
the Group’s relationship with sell-side analysts and investors
from around the world.
2012
2011
2010
2009
2008
Total number
of events
Total with
executives
421
233
336
254
238
191
243
179
199
170
During 2012, IR meetings were held with investors in the UK,
South Africa, North America and continental Europe, involving
193 individual institutions. In 2012, we met with each on average
2.2 times compared to 1.8 times in 2011, demonstrating an
increasing intensity of contact with institutions. The majority
of meetings involved the Group Chief Executive, the
Group Finance Director or another member of the senior
management team, although greater use was made of group
meetings in order to improve efficiency and provide more
institutions with access to management and also to increase
the efficient use of management’s own time.
95
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
Has the Company granted indemnities
to its directors?
The Company has entered into formal deeds of indemnity
in favour of each of the directors. A specimen copy of the
indemnities is available in the Corporate Governance section
of the Company’s website.
What is the Company’s policy on making
payments to its suppliers?
The Company has signed up to the Prompt Payment Code in
the UK. Under this, the Company undertakes:
■ To pay suppliers on time, within the terms agreed at the
outset of the contract, without attempting to change
payment terms retrospectively, and without changing
practice on length of payment for smaller companies
on unreasonable grounds
■ To give clear guidance to suppliers, providing suppliers
with clear and easily accessible guidance on payment
procedures, ensuring there is a system for dealing with
complaints and disputes which is communicated to
suppliers, and advising them promptly if there is any reason
why an invoice will not be paid in line with the agreed terms
■ To encourage good practice by requesting that lead
suppliers encourage adoption of the code throughout their
own supply chains.
The total outstanding indebtedness of the Company (and its
service company subsidiary, Old Mutual Business Services
Limited) to trade creditors at 31 December 2012 amounted
to £6.6 million, corresponding to 37 days’ payments when
averaged over 2012.
What charitable contributions did the
Company make in 2012?
The Group made a wide range of significant donations to
charitable causes and social development projects during
2012, as described in more detail in our Responsible Business
Report for 2012, which is available on our website. The
Company, its subsidiaries in the UK, and the Old Mutual
Bermuda Foundation collectively made charitable donations
of £149,000 during the year (2011: £216,000). For the Group
as a whole, the equivalent figure was £13.4m (2011: £14.2m
(excluding Nordic)).
Where can I find a description
of the Company’s approach
to environmental matters?
A description of the Group’s environmental impact and
management during the year is contained in our Responsible
Business Report for 2012, which is available on our website.
What are the Group’s employment policies?
The Group’s employment policies reflect our belief that
motivated and talented individuals are critical to our ability
to achieve our business objectives. We recognise the value
that a diverse workforce brings and believe that it should
reflect the diversity of the markets in which we operate.
We promote the fair and consistent treatment of all our
employees and encourage equal opportunities and diversity
across the Group.
While local employment policies and procedures are
developed by each business according to its own
circumstances, employees are recruited, retained, developed
and rewarded solely on the basis of their suitability for the
job, without discrimination in terms of race, religion, national
origin, colour, gender, age, marital status or sexual
orientation, subject always to employment equity
considerations in South Africa.
Did you make any political donations
during 2012?
The Group made no EU or other political donations during
the year.
What final dividend is being recommended
and what is your dividend policy?
The Board is recommending a final dividend for 2012 of 5.25p
per share (or its equivalent in other applicable currencies).
This equates to 2.5 times IFRS AOP earnings cover. A scrip
dividend alternative is not being made available in relation
to this dividend.
Further information on the final dividend for 2012 is contained
in the Shareholder Information section of this document.
From 2013 onwards, the Board intends to pursue a
progressive dividend policy consistent with our strategy,
having regard to overall capital requirements, liquidity
and profitability, and targeting a dividend cover of at least
2.25 times IFRS AOP earnings. Interim dividends will
continue to be set at about 30% of the prior year’s full
ordinary dividend.
How many shares are in issue?
The Company’s share capital is divided into ordinary shares
of 113⁄ 7 pence each. The issued share capital at 31 December
2012 was £559,214,849.60 divided into 4,893,129,934
ordinary shares of 113⁄ 7 pence each (2011: £580,104,127.70
divided into 5,801,041,277 ordinary shares of 10 pence each).
During 2012, 5,415,005 ordinary shares of 10p each were
issued under the Company’s employee share option schemes
at an average price of £0.6424 pence each and a further
21,986,215 ordinary shares of 113⁄ 7 pence each were issued
under those schemes at an average price of £0.4039 each.
The pre-existing ordinary shares of 10p each were
consolidated, on a 7-for-8 basis, in April 2012, following the
disposal of our Nordic business and to reflect the payment of
the Special Dividend out of the proceeds of sale. As reported
in last year’s Annual Report, 239,434,888 ordinary shares of
10p each formerly held in treasury were cancelled with effect
from 13 January 2012.
96
Old Mutual plcAnnual Report and Accounts 2012 At 31 December 2012, shareholder authorities were in force
enabling the Company to make market purchases of, and/or
to purchase pursuant to contingent purchase contracts
relating to each of the overseas exchanges on which the
Company’s shares are listed, its own shares up to an
aggregate of 486,692,500 shares. No shares were bought
back by the Company during 2012 or during the period up
to 1 March 2013.
Out of the 4,893,129,934 shares in issue at 31 December
2012, 161,366,539 shares were beneficially held by African
life and asset management subsidiaries of the Company.
Under UK company law, these shares cannot be voted while
they are beneficially owned by subsidiaries of Old Mutual plc.
The total number of voting rights in the Company’s issued
ordinary share capital at 31 December 2012 (which includes
the shares beneficially held by the African life and asset
management subsidiaries) was 4,893,129,934.
In the period 1 January to 1 March 2013, 215,880 further
shares were issued by the Company under its employee share
schemes at an average price of £0.628 each. No shares were
bought back during that period. As a result, the Company’s
issued share capital at 1 March 2013 was £559,239,521.60
divided into 4,893,345,814 ordinary shares of 113⁄ 7 pence
each. The total number of voting rights at that date was
also 4,893,345,814.
How can I find out about the rights
and obligations attaching to the
Company’s shares?
The rights and obligations attaching to the Company’s
ordinary shares are those conventional for a publicly listed
UK company, and a summary of them (along with certain
other information relating to dividends, directors and
amendments to the Company’s Articles of Association) is
available in the Corporate Governance section of the
Company’s website. The Company’s current Articles of
Association are also available there.
Does the Company have any significant
agreements involving change of control?
The following significant agreement to which the Company is
a party contains provisions entitling counterparties to exercise
termination or other rights in the event of a change of control
of the Company:
■ £1,200 million Revolving Credit Facility (the Facility) dated
21 April 2011 between the Company, various syndicate
banks (the Banks) and Banc of America Securities Limited
as agent (the Agent). If a person or group of persons acting
in concert gains control of the Company, the Company
must notify the Agent. The Agent and the Company will
negotiate with a view to agreeing terms and conditions
acceptable to the Company and all of the Banks for
continuing the Facility. If such negotiations fail within
30-days of the original notification to the Agent by the
Company, the Banks become entitled to declare any
outstanding indebtedness repayable by giving notice to
the Agent within 15 days of the 30-day period mentioned
above. On receiving notice for payment from the Agent,
the Company shall pay the outstanding sums within three
business days to the relevant Bank(s).
Who are currently the Company’s
largest shareholders?
At 31 December 2012, the following substantial interests in
voting rights had been declared to the Company in
accordance with the Disclosure and Transparency Rules:
Cevian Capital
Public Investment Corporation
of the Republic of South Africa
Sanlam Investment
Management (Pty) Limited
BlackRock Inc
Legal & General Group PLC
Old Mutual Life Assurance Company
(South Africa) Limited
31 Dec 2012
Number of
voting rights
359,405,008
268,811,081
255,514,951
238,981,311
152,095,032
148,380,709
% of
voting
rights
7.35
5.49
5.22
4.88
3.11
3.03
Between 31 December 2012 and 1 March 2013, there have
been no new notifications of disclosable interests by other
shareholders, but the Company has received notifications of
the following changes to the above interests:
BlackRock Inc
BlackRock Inc
BlackRock Inc
Event date
18/1/13
31/1/13
1/2/13
Notification
date
Number of
voting rights
22/1/13
1/2/13
5/2/13
244,654,440
241,440,319
245,074,793
% of
voting
rights
5.00
4.93
5.01
Can you confirm that the Company
is a going concern?
The Group’s business activities, together with factors likely
to affect its future development, performance and position
in the current economic climate, are set out in the sections
of this Annual Report entitled “What we do” and
“Where we are going”.
The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in the section
of this Annual Report entitled “How we have performed”.
In addition, Note E1 to the Accounts includes the Group’s
objectives, policies and processes for managing its capital
and sets out details of the principal risks related to financial
instruments and insurance risks including market, credit and
liquidity risks as well as their sensitivities.
The preceding sections of the Annual Report referred to
above also explain the basis on which the Group generates
and preserves value over the longer term and the strategy for
delivering the objectives of the Group. The FGD surplus
capital and cash flow are stress tested and are within the
limits described in the Risk and Capital Management section.
As a consequence, the directors believe that the Group is in
a strong financial position and is well placed to manage its
business risks successfully.
After making enquiries, the Board of Directors has a
reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for
the foreseeable future. Accordingly, they continue to adopt
the going concern basis in preparing the financial statements.
97
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessHow we govern our business DIRECTORS’ REPORT ON
CORPORATE GOVERNANCE
AND OTHER MATTERS continued
Has all relevant information been disclosed
to the auditors?
The directors who held office at the date of approval of
this Directors’ Report on Corporate Governance and other
matters confirm that, so far as they are each aware, there is
no relevant audit information of which the Company’s auditors
are unaware, and each director has taken all the steps that
he ought to have taken as a director to make himself aware
of any relevant audit information and to establish that the
Company’s auditors were aware of that information.
Governing law
The sections of this Annual Report under the headings
“Where we are going”, “How we have performed”,
“Our risks” and this Directors’ Report on Corporate
Governance and other matters, collectively comprise the
‘directors’ report’ for the purposes of section 463(1)(a)
of the Companies Act 2006. The Remuneration Report
set out in this Annual Report is the directors’ remuneration
report for the purposes of section 463(1)(b) of that Act.
English law governs the disclosures contained in and
liability for the directors’ report and the directors’
remuneration report.
By order of the Board
Martin Murray
Group Company Secretary
1 March 2013
98
Old Mutual plcAnnual Report and Accounts 2012
REMUNERATION
REPORT
In this section, we describe the
Company’s remuneration practices
during 2012 and its policies for
2013 and future years, with
particular emphasis on the
remuneration arrangements
for the executive directors
Summary
Context to the Remuneration Report
Remuneration policies and practice
Employee share plans
Further information
■ Introduction from the Chairman of the Remuneration Committee
■ Committee terms of reference, membership and meetings
■ Subsidiary remuneration committees
■ Performance graphs
■ Remuneration policy for executive directors
■ Overview of executive directors’ remuneration
■ Executive directors’ remuneration in 2013
■ Executive directors’ remuneration during 2012
■ Long-term incentives
■ Directors’ emoluments for 2012
■ Chairman's and non-executive directors’ remuneration
■ Change of control
■ Employee Share Ownership Trusts
■ Dilution limits
■ Directors’ interests under employee share plans
■ Company share price performance
■ Executive directors’ shareholding requirements
■ Terms of engagement – executive directors
■ Terms of engagement – Chairman and non-executive directors
■ Shareholder approval of the Remuneration Report
100
101
102
102
103
103
104
106
107
111
112
112
113
113
114
115
115
115
115
116
99
How we govern our businessFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business REMUNERATION
REPORT
Introduction from the Chairman of the
Remuneration Committee
Executive pay has been subject to significant investor focus
over the last four years, following the 2008 financial crisis.
In this context, the Remuneration Committee of the Board of
Old Mutual plc (referred to in the rest of this report as ‘the
Committee’) is cognisant of:
■ Changing regulatory governance guidelines and principles
to reflect changing conditions in the financial sector
■ Significant pressure exerted by shareholders and
shareholder bodies where they feel reward is not aligned
to performance
■ Somewhat different shareholder expectations in this
respect in the main regions where the Group operates
■ Differing responses by companies trying to adapt to the
changing environment and best practice advice.
In this respect, extensive work has been done by the Company
to develop risk management processes that ensure rewards
are appropriately aligned with both short- and long-term
performance and do not encourage excessive risk-taking in
the Group. This approach has been adopted in line with FSA
guidelines and the evolving requirements of Solvency II.
During 2012, the long-term incentives granted in 2009 vested
fully against the agreed three-year performance targets. This
was the first time in four years that vesting had occurred
under the long-term incentive plan.
For awards made under the Old Mutual Strategic Incentive
Plan (OMSIP) in 2010, which were subject to targets for
vesting at the end of 2012:
■ 85.9% attainment was achieved in relation to awards made
with Financial Objectives, although actual vesting will be in
two equal tranches in 2013 and 2014; and
■ 75% attainment was achieved in relation to the one-time
awards made for Rationalising Objectives, specifically
approved by shareholders in 2010 to incentivise a change
in the strategic direction and restructuring of the Group
over three years. Vesting will be in two equal tranches in
2013 and 2014.
After the 2010 and 2011 OMSIP awards, revised long-term
incentive financial targets were agreed for 2012 awards, as
described in the 2011 Remuneration Report, in order to
provide an appropriate level of reward for sustained
financial performance within agreed risk parameters.
For 2013, based on shareholder consultation, changes have
been made to reflect the fact that further progress is
expected on some key strategic initiatives. It is important that
management incentives are adequately aligned. These
changes are set out in more detail on pages 104 and 105.
The following key points regarding executive remuneration
are described in detail in the body of the report that follows:
■ During 2012, the short-term incentive plan resulted in
awards above target, but below maximum levels, to reflect
the good ongoing financial performance and sound
risk management of the Group
■ Basic salary increases for executive directors (and for other
members of the Group Executive Committee) effective in
2013 were below inflation and below average increases
provided to other employees across the Group
■ Neither short-term nor long-term incentive percentages
were increased for executive directors for 2013.
These actions and results are in line with the Committee’s
determination to ensure that executive pay does not become
unduly inflated, is transparent and remains directly linked to
Group performance. When performance over the
measurement period does not merit incentive payouts, they
are not made. Conversely, when performance over the
measurement period does merit incentive payouts, they are
made. Payments are made in cash and shares, with shares
being subject to claw-back.
Recognising the increasing need for clarity, transparency and
disclosure of remuneration and incentive arrangements, the
Company has:
■ Implemented a transparent approach to performance
targets for long-term incentives
■ Improved clarity to give a clear view of total remuneration
in ‘one number’, which has been calculated in line with the
guidelines provided by the Department for Business,
Innovation & Skills (BIS) which will become mandatory
from later this year.
This is my last year as a member and Chairman of the
Committee as, after nine years on the Board and two years
as Chairman of the Committee, I will be retiring at the
Company’s Annual General Meeting in May. I wish my
successor, Alan Gillespie, well in taking over responsibility
for chairing the Committee.
Russell Edey
Chairman of the Remuneration Committee
1 March 2013
100
Old Mutual plcAnnual Report and Accounts 2012
This report has been prepared by the Committee and approved by the Board. The figures included in the sections of this report headed
‘Performance graphs’ on page 102, ‘Executive directors’ remuneration during 2012’ on pages 106 and 107, ‘Directors’ emoluments for
2012’ on page 111 and ‘Directors’ interests under employee share plans’ on page 114, have been audited by KPMG Audit Plc as required
by the Large & Medium-sized Companies and Groups (Accounts & Reports) Regulations 2008. Their audit report is set out on page 119.
The information in the remainder of this report has not been audited.
Committee terms of reference, membership and meetings
The Committee is a committee of the Board. Its full terms of reference are published on the Company’s website. The Committee is responsible for:
■ Determining the remuneration, incentive arrangements, benefits and any compensation payments of the executive directors
■ Determining the remuneration of the Chairman of the Board
■ Monitoring and approving the level and structure of remuneration of the Group Company Secretary, senior executive employees (as
identified by the Board) and those who perform a significant influence function or whose activities have, or could have, a material impact on
the risk profile of the Company or as defined for compliance with regulations in accordance with the Group’s remuneration policy
■ Reviewing, monitoring and approving, or recommending for approval, the Company’s share incentive arrangements and awards.
The following, all of whom are or were at the relevant time independent non-executive directors of the Company, served as members of the
Committee during the year:
Name of non-executive director
Russell Edey
Eva Castillo
Alan Gillespie
Bongani Nqwababa
Lars Otterbeck
Position
Chairman
Member
Member
Member
Member
Period on the Committee
June 2007 to date (Chairman since May 2011)
February 2011 to February 2013
November 2010 to date
April 2010 to date
April 2010 to date
The Committee Chairman has access to and regular contact with the Group Human Resources Department independently of the executive
directors. During 2012, the Committee met five times. The Board accepted the recommendations made by the Committee during the year
without amendment. The Group Company Secretary, Martin Murray, acted as Secretary to the Committee until August 2012, at which time Paul
Forsythe, Assistant Company Secretary, replaced him as Secretary to the Committee. Attendees (including Martin Murray and Paul Forsythe) at
Committee meetings to which they were respectively invited during 2012 were as follows:
Name
Philip Broadley*
Paul Forsythe
Tom Gosling
Alan Judes
Martin Murray*
Patrick O’Sullivan*
Julian Roberts*
Don Schneider*
Kevin Stacey
Position
Group Finance Director
Assistant Company Secretary
PricewaterhouseCoopers (PwC)
Independent Adviser to the Committee
Group Company Secretary
Chairman of the Board
Group Chief Executive
Group HR Director
Head of Remuneration
* Other than when their own remuneration was being discussed.
Attendance at meetings
1
5 (2 as Secretary)
1
5
5 (3 as Secretary)
5
5
5
5
The Committee renewed the appointment of Alan Judes as its independent adviser for 2012, through his consultancy Strategic Remuneration,
and has also done so for 2013. A copy of his letter of engagement is on the Company’s website. Any work that the Company wishes Alan Judes
to do on its behalf, rather than for the Committee, is pre-cleared with the Committee Chairman with a view to avoiding conflicts of interest.
No work was performed by Alan Judes for the Company, as distinct from the Committee, during 2012. Work undertaken by Alan Judes for
the Committee during 2012 included advising the Committee in connection with benchmarking of the total reward packages for the executive
directors and other senior members of staff, the design of short-term and long-term incentive arrangements, updating the Committee on
trends in compensation and corporate governance best practice including regulatory requirements from Government departments and the FSA,
advising in connection with disclosure of emoluments, base salary increases and RPI, design of performance measures, advising in connection
with the assessment of OMSIP Rationalising Objectives, and accompanying the Chairman of the Committee to meetings with shareholder
representatives to discuss remuneration structures. Strategic Remuneration is a member of the Remuneration Consultants Group and adheres
to that body’s Code of Conduct. His consultancy company’s fees for 2012 totalled £107,000 excluding VAT (2011: £72,000 excluding VAT).
Don Schneider and Kevin Stacey of Group Human Resources assisted the Committee during the year. Group Human Resources provided
supporting materials for matters that came before the Committee, including comparative data and justifications for proposed salary, benefit,
annual incentive plan and share awards and criteria for performance targets and appraisals against those targets. Group Human Resources
used the services of external advisers (including PwC) as necessary.
101
How we govern our businessFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business The graph below shows the TSR to 31 December 2012 on
£100 invested in shares in Old Mutual plc on 31 December
2009 compared with £100 invested in the FTSE100 Index and
on R100 invested in shares in Old Mutual plc on 31 December
2009 compared with R100 invested in the JSE ALSI. The
three-year period shown coincides with the measurement
period for targets set for the long-term incentive awards
granted in 2010 and due to vest 50% in 2013 and 50% in 2014.
Old Mutual plc TSR performance:(cid:11)
Three-year performance to 31 December 2012
Old Mutual
FTSE100
Old Mutual (JSE)
JSE All Share
250
200
150
100
50
0
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
Source: Datastream
REMUNERATION
REPORT continued
Subsidiary remuneration committees
Remuneration committees operate at subsidiary level around
the Group to oversee local remuneration. In addition, the
Management Remuneration Committee (MRC) co-ordinates
policy and governance of executive remuneration at
management tiers immediately below director and Group
Executive Committee level and is responsible for the
implementation of these in Group Head Office. The MRC
and other subsidiary remuneration committees are supported
and attended by Group Human Resources and apply
common principles, including the following:
■ Remuneration must support the business drivers, corporate
vision, strategy and strategic priorities
■ Incentives should align the interests of employees
with shareholders
■ Incentives should be performance-related and effectively
linked to success in delivering the chosen strategy
■ Pay should be set at levels that are both competitive
and sustainable
■ Remuneration should not encourage risk that exceeds the
Group’s risk tolerance
■ Remuneration must be viewed in conjunction with wider
people-management practices to support a consistent
approach to achieving desired culture and behaviour
■ All pay must be compliant with local legislation
■ Underperformance should be dealt with on a formal basis
according to local policies.
Performance graphs
The graph below shows the total shareholder return (TSR) to
31 December 2012 on £100 invested in shares in Old Mutual
plc on 31 December 2007 compared with £100 invested in
the FTSE100 Index. The other points are the comparative
returns at the intervening financial year-ends.
In the opinion of the directors, the FTSE100 Index is the most
appropriate index against which to measure the Company’s
TSR, as it is an index of which Old Mutual plc is a member
and is located where the Company has its primary listing.
Old Mutual plc TSR performance:
Five-year performance to 31 December 2012
Old Mutual
FTSE100
140
120
100
80
60
40
20
0
31 Dec
2007
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
Source: Datastream
102
Old Mutual plcAnnual Report and Accounts 2012 Remuneration policies and practice
Remuneration policy for executive directors
The Company embraces the principles of the UK Corporate Governance Code relating to directors’ remuneration and complies with its
provisions. The following are the guiding principles that the Committee has applied during 2012 and intends to apply during 2013:
■ To take account of appropriate benchmarks, while using such comparisons with caution and recognising the risk of an upward ratchet of
remuneration levels with no corresponding improvement in performance. Large UK insurers and members of the UK FTSE100 Index, with
particular reference to a subset by market capitalisation, provide the benchmarks for UK-based executive directors
■ To be sensitive in determining, reviewing, monitoring and approving matters under its remit in relation to pay and employment conditions
around the Group, where relevant
■ To make a significant percentage of total maximum potential rewards in the form of share-based incentives in order to align the executive
directors’ interests closely with those of shareholders
■ To provide an opportunity for remuneration packages to be in the upper quartile of the comparator group through payments under
short-term and long-term incentive schemes if superior performance is delivered
■ To focus attention on the main drivers of shareholder value by linking performance-related remuneration to clearly defined objectives and
measurable targets
■ To design remuneration arrangements that will attract, retain and motivate individuals of the exceptional calibre needed to lead the Group’s
development.
The Committee has regard to risk-related metrics in reviewing and evaluating the executive directors’ short-term performance and receives
and considers a report from the Group Chief Risk Officer. It also has discretion to consider corporate performance on environmental, social
and governance (ESG) issues, to the extent relevant, when setting their remuneration. It ensures regulatory requirements relating to
remuneration matters are met and that remuneration policies are consistent with, and promote, effective risk management.
The Committee’s policy is influenced by the need to be competitive with other international financial services groups, while avoiding any excess.
This includes its approach to setting the fixed elements of remuneration at or below median. It reviews this policy regularly and continues to
consider it to be appropriate.
Following the removal of compulsory retirement ages in the UK, it is the Company’s policy to have employment contracts without a specified
duration. Notice periods are between six and twelve months and mitigation is applied to any termination payments that have to be made
under contract.
Overview of executive directors’ remuneration
The Committee reviews the structure of the executive directors’ remuneration packages annually to satisfy itself that the balance between fixed
and variable remuneration and short-term and long-term incentives and rewards remains appropriate. The overall make-up of the
remuneration packages for the executive directors is as follows:
Element
Basic salary
Benefits
Short-term incentives
Long-term incentives
Description
Reviewed each January, taking into account market benchmarks and the level of increases awarded to all Group
employees.
The policy is to pay a benefit allowance and pension contributions to a total value of 35% of basic salary. Life cover
of £1m and disability cover capped at an annual basic salary of £140,000 are also provided. From 1 April 2013,
changes to benefits will come into effect as follows: (i) Life cover will increase to £1.25m, with an option to
increase cover to 6x base salary, subject to the insurer’s underwriting process and approval; (ii) disability cover
will be capped at an annual basic salary of £120,000 for a maximum of five years; and (iii) single private health
cover will be provided. These changes align to updated provisions for all UK employees.
Payable subject to achievement of agreed financial targets and agreed scorecard objectives. The policy is
currently to make a maximum award of 150% of basic salary, half in cash and half deferred in Company restricted
shares for three years. Deferred awards are subject to claw-back.
The policy is currently a maximum award of 250% of basic salary. Vesting is subject to agreed performance
targets as set out in the section of this report entitled ‘Long-term incentives’. Awards are subject to claw-back.
The following chart depicts the overall make-up of the executive directors’ respective remuneration packages for 2013, assuming on-target
delivery on short-term incentives and an expected value for long-term incentives:
Julian Roberts
Philip Broadley
0
20%
40%
60%
80%
100%
Basic Salary
Benefit Allowance
Cash Short-Term Incentive
Deferred Short-Term Incentive
Long-Term Incentive
103
How we govern our businessFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
REMUNERATION
REPORT continued
Executive directors’ remuneration in 2013
Basic salary and benefits
With effect from 1 January 2013, Julian Roberts’ basic salary was increased by 1.7%, from £870,000 to £885,000, and Philip Broadley’s basic
salary was increased by 1.7%, from £580,000 to £590,000. These increases were below the average increases for other employees across the
Group, ranging from 2% for staff in the UK to in excess of 5% in South Africa (other business units in Europe and US falling within this range), in
line with the local market. Before making the decision on the increases for the executive directors, the Committee considered the salary
increases for other employees in the Group as set out above. Benefits equivalent to 35% of basic salary will continue to be payable either as
contributions to agreed benefits or monthly in cash. Life cover and disability cover will continue to be provided and, with effect from April 2013,
single private health cover will be provided.
Pension and flexible investment plans
The Company offers a pension plan and has introduced an Employee Flexible Investment Plan, which has been approved for its UK-based
employees. Julian Roberts and Philip Broadley qualify to participate in both plans, but have indicated that they will not be contributing to either
during 2013 and that they intend to opt out of pension ‘auto-enrolment’ when that is introduced later this year. The Company will therefore not
be making contributions to any such schemes on their behalves.
Short-term incentives for 2013
The short-term incentive policy to be applied during the year is described on page 103 above and there have been no changes to the policy
from 2012 to 2013. The respective weightings attached to Group metrics and scorecard objectives, shown as a percentage of basic salary, for
the executive directors’ short-term incentives for 2013, are as follows:
Elements as % of salary
Group targets
EPS (in constant currency)
RoE
Group targets – sub-total
Scorecard objectives
Total
Julian Roberts
Philip Broadley
Maximum %
Maximum %
56.25
56.25
112.50
37.50
150.00
37.50
37.50
75.00
75.00
150.00
In addition to Group targets, the executive directors, as with all senior executives, are measured annually against a balanced scorecard. In his
role as Group Finance Director, Philip Broadley is responsible to the Board for all financial matters, including management control over the
Group Internal Audit, Compliance and Risk functions. The scorecard elements of his short-term incentives therefore have a higher weighting
than for the Group Chief Executive and line management executives, as there is more emphasis on the financial risk, governance and capital
management objectives that are crucial to success in his role.
Long-term incentives for 2013
The Company will continue to align leadership incentives with the delivery of a shared Group vision, strategy and desired culture through
agreed values and behaviours. In South Africa, this will focus on the retail segment as well as successful expansion into sub-Saharan Africa,
through the combined efforts of Nedbank, OMSA and Mutual & Federal. In Old Mutual Wealth, the main strategic opportunities are in
delivering cost efficiencies, building an integrated, modern wealth management business in the UK and in selected international markets
supported by a successful asset management business and managing the remaining European businesses for value. In the US, the focus will be
on the improvement of USAM’s performance in terms of margin and net client cash flow and the effective management of risk and liabilities in
Old Mutual Bermuda.
Previously, under OMSIP, part of the executive directors’ long-term incentives was linked to Rationalising Objectives relating to strategic
initiatives to be undertaken by the Group between 2010 and 2012, however, for awards made in 2012 there was no strategic element. Some
shareholders have expressed concern about this and suggested that there should be both a strategic element and a returns measure in the
long-term incentive plan. To address these concerns, we have expanded the core set of measures, as set out below, by adding a strategic
element and a return on equity measure. The outcome of the measures will be subject to the TSR-multiplier mechanism implemented in 2012.
The resultant change from awards granted in 2012 is illustrated below:
2012 Long-term incentives
Cumulative AOP multiplied by relative TSR performance*
AOP (£bn)
% Vesting
Threshold
2.9
0%
|–––––––Interpolated–––––––|
Maximum
3.5
100%
*
Relative TSR performance (calculated 50% against the FTSE100 Index and 50% against the JSE ALSI) as set out on page 111.
104
Old Mutual plcAnnual Report and Accounts 2012 l
a
i
c
n
a
n
F
i
j
s
e
v
i
t
c
e
b
O
c
i
g
e
t
a
r
t
S
Total
2013 Long-term incentives
LTI Scorecard
EPS (p) (IFRS AOP based CAGR*) (post tax)
EPS (c) (IFRS AOP based CAGR*) (post tax)
RoE – (IFRS AOP based – averaged over 3 years)
1. Emerging Markets – Africa expansion (excluding banking)
Customer growth in Africa (excluding SA) (CAGR*)
Profit (AOP) growth in Africa (excluding SA) (CAGR*) (pre tax inc. LTIR)
2. Old Mutual Wealth
Threshold
5.0%
5.0%
12.0%
10.0%
10.0%
Target
7.5%
7.5%
13.5%
15.0%
15.0%
Maximum
10.0%
10.0%
15.0%
20.0%
20.0%
Weight
15.0%
15.0%
30.0%
10.0%
5.0%
Profit (AOP) growth UK and International (CAGR*) (pre tax)
10.0%
15.0%
20.0%
7.5%
3. Simplify/de-risk the Group
Group structural changes/key initiatives
4. Risk, governance, culture and reputation
Measures of Risk, governance, culture and reputation
Targets disclosed at the end of the three-year
performance period
Assessed against targets and qualitatively
12.5%
5.0%
100%
* Compound annual growth over the three-year performance period.
Scorecard for Strategic Objectives
1. Emerging Markets
— Core measures of focus are growth in African business outside South Africa, focusing on customers and profit.
— This is in the Life and Short-term insurance businesses. It excludes banking (Nedbank, Central Africa Building Society) and minority interests.
— The Committee will also make a qualitative assessment of the overall delivery of a range of measures against plan.
2. Old Mutual Wealth
— Growth in AOP is the core measure – UK and International.
— The Committee will also make a qualitative assessment of the overall delivery of a range of measures against plan.
3. Simplify/de-risk the Group
Agreed structural initiatives are confidential, but include, for example:
— Old Mutual Wealth restructuring projects and managing the European businesses for value.
— Successful hedging of residual risk in Bermuda and efficient run-off of the business.
4. Risk, governance, culture and reputation
The Committee will use a number of measures to assess risk, culture and any impacts on governance and reputation, including the following:
■ Risk assessments against key risk measures and risk appetite – assessed annually and over the three-year period
— Includes overall assessment of material breaches in risk, regulatory or governance issues and any reputational impact.
■ Annual culture survey results compared to prior years’ results and to international standards
— Measured at Group and business level for improved scores where needed or maintenance where levels in 2012 are high.
The Committee will apply its discretion in determining the final outcomes in relation to the 2013 long-term incentives, and in this regard:
■ The Committee will receive a report from the Chief Risk Officer to confirm that the performance of the Group has been achieved within the
stated risk appetite. Where the risk appetite has been breached, the Committee will have discretion to reduce the level of vesting accordingly
■ The Committee will exercise its discretion to make adjustments where there is a significant negative impact on underlying financial
performance which is not adequately reflected in AOP results (for example, where LTIR adjustments create any inconsistency between AOP
and IFRS basic earnings)
■ Where the Group undergoes a significant change, such as a large disposal, acquisition or restructuring, the Committee will review the targets
to assess whether they need adjusting to reflect the change, or whether they should be replaced altogether.
TSR multiplier*
A TSR multiplier will be used to adjust the weighted average outcome of the LTI scorecard in the table above, as follows. TSR will be averaged
at the start (Q4 2012) and end (Q4 2015) of the three-year performance period.
Threshold
Target
Maximum
Relative TSR vs. index
4% or more below index
equal to index
4% or more above index
Multiplier
0.85
1.00
1.15
*
Relative TSR performance (calculated 50% against the FTSE100 Index and 50% against the JSE ALSI) against the above ranges, with a multiplier being set on a straight-line basis
between the points.
The maximum award for the executive directors, inclusive of the maximum TSR multiplier above, remains at 250% of basic salary at the date
of award, and vesting will occur 50% after three years (in 2016) and 50% after four years (in 2017).
105
How we govern our businessFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business
REMUNERATION
REPORT continued
Executive directors’ market benchmarking
The following graphics show market comparisons of Julian Roberts’ and Philip Broadley’s respective remuneration packages, based on basic
salary and maximum award levels, for short-term and long-term incentives benchmarked in 2012, against a similar analysis of the UK insurers
and the FTSE 26-75 companies by market capitalisation:
Group Chief Executive vs. benchmarks
LTIP
Annual bonus
Basic salary
Upper quartile
Median
Lower quartile
LTIP
Annual bonus
Basic salary
Upper quartile
Median
Lower quartile
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Insurers
FTSE 26-75
Insurers
FTSE 26-75
Insurers
FTSE 26-75
Old Mutual
Basic salary
Total cash
Total direct
remuneration
Group Finance Director vs. benchmarks
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Insurers
FTSE 26-75
Insurers
FTSE 26-75
Insurers
FTSE 26-75
Old Mutual
Basic salary
Total cash
Total direct
remuneration
Executive directors’ remuneration during 2012
Basic salary and benefits
Julian Roberts’ basic salary was £870,000 and Philip Broadley’s basic salary was £580,000. Benefits equivalent to 35% of basic salary were
paid monthly in cash. Life cover of £1m and disability cover capped at an annual basic salary of £140,000 were also provided at a cost of
approximately £2,000 for each director.
Pensions
Julian Roberts is a deferred member of the defined contribution section of the Old Mutual Staff Pension Fund (OMSPF). The accumulated value
of Julian Roberts’ funds in the OMSPF was £311,405 at 31 December 2012 (£281,900 at 31 December 2011). Philip Broadley does not
participate in any employer-provided pension scheme of the Group.
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Old Mutual plcAnnual Report and Accounts 2012
Short-term incentive targets for performance year 2012
The payment of short-term incentives is subject to the achievement of pre-determined financial targets and scorecard objectives based on the
key deliverables for each executive director, as reviewed and approved by the Committee. Details of the structure and outcomes of the metrics
for Julian Roberts’ and Philip Broadley’s short-term incentives for 2012 are set out in the following table:
Elements as % of salary
Group targets
EPS
RoE
Group targets – sub-total
Scorecard objectives
Total
£000 incentive for period
Achieved incentive as % of max
Julian Roberts
Philip Broadley
Maximum %
Achieved %
Maximum %
Achieved %
56.3
56.3
112.5
37.5
150.0
1,305
43.0
53.9
96.9
35.3
132.2
1,150*
88.2
37.5
37.5
75.0
75.0
150.0
870
28.7
35.9
64.6
67.5
132.1
766*
88.1
*
These amounts are as reflected in the Directors’ emoluments for 2012 table on page 111 and will be paid 50% in cash and 50% deferred for three years in the form of forfeitable shares
awards. The Committee had regard to risk-related metrics in reviewing and evaluating the executive directors’ short-term performance for 2012 and, as part of this, received and
considered a report from the Group Chief Risk Officer submitted via the Board Risk Committee.
Summary of 2012 remuneration
The following table shows the value of remuneration earned by the executive directors in 2012. It reflects the gross (pre-tax) value of salary and
benefits earned in the year, based on the short-term incentives to be paid in cash and shares in 2013 (in relation to 2012 performance) and an
estimated market value, on the date of vesting, of any long-term incentive shares or share options where targets were determined to have been
met during the year. This analysis is consistent with the ‘one number’ determined by BIS as part of its proposals for more detailed future
reporting requirements.
Elements
Basic salary
Benefits allowance
Short-term incentives (50% cash and 50% deferred)
OMSIP 2010 Long-term incentives vesting in 2013*
OMSIP 2010 Long-term incentives vesting in 2014*
Total
Julian Roberts
Philip Broadley
£870,000
£304,500
£1,150,358
£2,424,047
£2,424,047
£580,000
£203,000
£766,470
£1,606,298
£1,606,298
£7,172,952 £4,762,066
*
Reflects the full value of long-term incentive awards that will vest equally in May 2013 and May 2014, in accordance with the BIS ‘one number’ approach based on the average Old
Mutual plc share price for the three months ended 31 December 2012, namely 172.8p.
Long-term incentives
Long-term incentive awards are made annually and, in selected cases, upon joining the Group. Vesting is based on the attainment of
performance targets over the following three-year period, to incentivise executives to achieve these long-term goals. Below is the vesting history
of the most recent awards:
Plan
Bonus Matching
Bonus Matching
Bonus Matching
Bonus Matching
Award date
Vesting date
Performance targets
29 March 2006
30 March 2007
3 April 2008
8 April 2009
29 March 2009
30 March 2010
3 April 2011
8 April 2012
Growth in EPS
Growth in EPS
Growth in EPS
50% RoE and 50% EPS
% vested
0%
0%
0%
100%
2010 OMSIP awards
The OMSIP was implemented for the executive directors and certain other senior members of management in 2010 under the Old Mutual plc
Performance Share Plan – Restricted Shares, to align long-term incentives to the strategy announced in March 2010. The 2010 OMSIP award
was made in two parts, with the first part being a one-time award based on Rationalising Objectives and debt reduction and the second part
being an annual award based on key Financial Objectives relating to the restructuring of the Group. Substantial progress has been made
towards delivering strategy, in particular in simplifying and de-risking the Group. The Company has:
■ Delivered strong business unit performance improvements, especially in Nedbank and USAM
■ Achieved the three-year RoE, cost-saving and debt repayment targets that were set in 2010
■ Increased collaboration across the businesses to deliver synergies
■ Embedded a common Group-wide culture of desired behaviours and aligned remuneration and reward, specifically in the Company’s
Long-Term Savings business (LTS), to drive the delivery of the three-year strategic targets.
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REMUNERATION
REPORT continued
Details of the specific targets for 2010 OMSIP awards and the outcomes achieved are set out below. Each award made to the executive
directors under the OMSIP in 2010 had a face value of 250% of basic salary.
Plan
OMSIP – annual (Financial Objectives)
OMSIP – one-off (Rationalising Objectives)
Award date
Vesting date
Performance target
13 May 2010
50% 13 May 2013
50% 13 May 2014
13 May 2010
50% 13 May 2013
50% 13 May 2014
50% LTS (AOP, RoE,
NCCF/AUM)
50% Absolute TSR
Rationalising
Objectives and
debt reduction
2010 OMSIP Financial Objectives
The OMSIP annual awards related to key financial goals split equally between the financial performance of the Company’s LTS business
post-restructuring and absolute TSR targets, the outcomes of which are shown below:
Overall Financial Objectives – outcomes
Metric
LTS Performance
Absolute TSR
Total
The underlying calculations in respect of these targets are summarised below:
LTS Business Performance (50%)
Metric
Cumulative IFRS AOP growth
RoE
Average ratio of NCCF/AUM
Total LTS
Absolute TSR (50%)
Metric
TSR (in GBP p.a.)
TSR (in ZAR p.a.)
Total TSR
Weight
Threshold
Maximum
40%
40%
20%
30%
15%
2%
70%
18%
6%
Weight
Threshold
Maximum
50%
50%
10%
10%
20%
20%
Weight
50.0%
50.0%
Result
51.5%
19.7%
3.2%
Result
19.4%
24.8%
Outcome
Metric
74.1%
97.8%
Outcome
Metric
63.1%
100.0%
44.5%
Outcome
Metric
95.5%
100.0%
Wt. Total
37.0%
48.9%
85.9%
Wt. Total
25.2%
40.0%
8.9%
74.1%
Wt. Total
47.8%
50.0%
97.8%
Vesting is 20% at threshold and straight-line interpolation between threshold and maximum.
2010 OMSIP Rationalising Objectives
In 2010, a one-off award was made to incentivise executives to deliver key initiatives which related to the restructuring of the business to
streamline the Company, unlock value and reduce debt. Measurement criteria for each initiative were agreed to be:
■ Total value released relative to available benchmark transactions
■ Quality of execution including risk, reputational and other non-financial impacts
■ Amount available to reduce debt from the proceeds of rationalising, in the context of the Company’s stated target of £1.5bn of debt reduction.
Over the course of the three-year measurement period, the Company undertook a number of key initiatives to accomplish the goals of
restructuring. The Committee evaluated the following initiatives:
1. The sale of the US Life business
2. The attempted sale of Nedbank
3. The restructuring and proposed initial public offering (IPO) of the US Asset Management business
4. The sale of the Nordic business
5. The restructuring of the Company’s LTS business.
In evaluating each initiative against the three criteria, the Committee reviewed relevant quantitative and qualitative information. The information
was presented to the Committee and discussed fully before a decision was made regarding the percentage level of achievement.
The evaluation of each initiative is discussed below:
108
Old Mutual plcAnnual Report and Accounts 2012 Sale of the US Life business
As disclosed in the 2011 Remuneration Report, the Committee evaluated this initiative as 100% achieved against the three criteria. Factors
considered were the total proceeds of sale, the fact that all proceeds were available to pay down debt, the significant reduction in risk achieved
by removing this business from the Group and the fact that this sale was achieved in an environment where virtually no other comparable
transactions took place.
Sale of Nedbank
In 2010, a preliminary agreement was reached for the sale of Nedbank, but the transaction did not complete. Therefore, the Committee
concluded that 0% was achieved.
Restructuring and proposed IPO of the US Asset Management business
A stated objective of management was the restructuring and IPO of the US Asset Management business. During the period, a number of
initiatives related to this objective took place:
■ Sale of OMCAP to Touchstone Investments
■ Sale of Dwight to Goldman Sachs
■ Management buy-outs of Lincluden, 300 North Capital, 2100 Xenon, Larch Lane Advisors, Ashfield Capital Partners and Analytic Investors.
No IPO was launched during the period.
In assessing these actions, the Committee considered the proceeds from these sales and buy-outs, the impact on significantly improved
operating profits and margins achieved by removing these businesses, the impacts on net client cash flows into USAM, any ongoing
commitments to the businesses sold and the overall readiness of the resulting business for a successful IPO, if and when a decision is
made to proceed. These IPO readiness factors were weighed against the fact that an IPO had neither been attempted nor achieved.
The Committee assessed the totality of these actions against the three criteria and concluded an evaluation of 50% achievement.
Sale of the Nordic business
The Company sold its Nordic business to Skandia Liv in March 2012 for £2.1 billion. This enabled a Special Dividend of 18p per share
(or its equivalent in other applicable currencies) to be paid to the Company’s shareholders as well as a material reduction in Group debt.
In evaluating this initiative, the Committee reviewed various factors including the total proceeds of the sale, the fact that the sale enabled a
Special Dividend to be paid and a significant reduction to take place in Group debt, the premium value received above standard valuation
metrics, the successful completion of the transaction in an environment where few, if any, comparable transactions were achieved and the
successful transitional arrangements achieved in separating the businesses.
The Committee evaluated this initiative against the criteria and concluded an evaluation of 100% achievement.
Restructuring of the Company’s LTS business
Over the period, the Company undertook a number of initiatives to restructure the Company’s LTS business to streamline, simplify and align its
structure for future profitability. These initiatives included:
■ Sale of the Finnish business
■ Closure of the Swiss, German and Austrian operations to new business
■ Combining Skandia Investment Group with Old Mutual Asset Managers (UK) to create Old Mutual Global Investors (OMGI)
■ Merging of businesses in Retail Europe into Wealth Management, to streamline operations, align legal structures and achieve cost synergies
■ Completion of the Zimbabwe indigenisation programme
■ Elimination of significant inter-company debt between South Africa and the Company and also within the European entities to simplify the
Group’s financial structure.
The number of different initiatives led the Committee to consider a variety of factors including proceeds from the Finnish sale, the reduction in
risk from closing to new business in Europe, the cost synergies achieved through streamlining and alignment under Wealth Management (now
Old Mutual Wealth), the release of capital resulting from the Zimbabwe indigenisation and the flexibility achieved through the simplification of
financial structures.
The Committee evaluated these initiatives against the three criteria and concluded an evaluation of 50% was achieved.
Weighting of rationalising initiatives
The various initiatives were then weighted by the Committee based on their contribution toward the original objectives to streamline the
Company, unlock value and reduce debt. The Committee’s decisions on weightings and achievement are summarised below:
Initiative
Sale of the US Life business
Sale of Nedbank
Restructuring and proposed IPO of the US Asset Management business
Sale of the Nordic business
Restructuring of the Company’s LTS business
Total
Weight
Achievement
22.50%
10.00%
12.50%
37.50%
17.50%
100.00%
100.00%
0.00%
50.00%
100.00%
50.00%
Total
22.50%
0.00%
6.25%
37.50%
8.75%
75.00%
109
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REPORT continued
Final assessment against objective of £1.5bn debt reduction target and any new information
As outlined in the plan, an overall objective of the initiatives was to provide proceeds to reduce Group debt by £1.5bn. The Committee retained
discretion to reduce the vesting level of the award if this overall objective was not met, or if any other new information arose to suggest a
different performance assessment. The debt reduction objective was fully achieved in September 2012 and no new information regarding
achievement of any of the initiatives arose, which materially impacted earlier assessments. Therefore, the Committee concluded that no
reduction was appropriate and the overall achievement of the OMSIP Rationalising Objectives was 75%.
2011 OMSIP awards
The 2011 awards used the same financial targets as the annual awards granted in 2010, relating to key financial goals, split equally between
the financial performance of the Company’s LTS business post-restructuring and absolute TSR targets, as set out below. The awards made to
the executive directors under the OMSIP in 2011 had a face value of 250% of basic salary at the time of award, and will vest 50% in 2014 and
50% in 2015.
LTS business performance (50%)
Metric
IFRS AOP growth1
RoE2
Average ratio of NCCF/AUM3
Vesting %*
Weight
Below threshold
Threshold
Maximum
40%
40%
20%
< 42%
< 15%
< 2%
0%
42%
15%
2%
20%
103%
18%
6%
100%
* Straight-line interpolation between threshold and maximum.
1 Growth in AOP excluding Long-Term Investment Return on a constant currency basis over a four-year performance period.
IFRS AOP over aggregate equity allocated to the Company’s LTS business in the final year of the performance period.
2
3 The ratio of the Net Client Cash Flow (NCCF) over Assets under Management (AUM) will be calculated on a simple average basis over the full three years.
Absolute TSR (50%)
TSR will be measured on an absolute basis, 50% in rand and 50% in sterling, and will be averaged at the start (Q4 2010) and end (Q4 2013)
of the three-year performance period. Old Mutual’s TSR growth will then be compared with the vesting schedule set out below to determine
the outcome:
Metric
Annual growth in absolute TSR (% p.a.)
Vesting % *
* Straight-line interpolation between threshold and maximum.
Below threshold
Threshold
Maximum
<10%
0%
10%
20%
20%
100%
The Committee must be satisfied that the Company’s TSR performance reasonably reflects its underlying financial performance over the
period. Threshold performance is aligned with Old Mutual’s cost of equity and the maximum is aligned with performance in excess of the
historic upper-quartile performance within the insurance sector.
The 2011 OMSIP award will vest based on performance over the period 2011 to 2013 (for AOP over the four-year period 2010 to 2013) and
the Committee will report the outcome in 2014.
2012 Long-term incentives
The primary target for long-term incentive awards made in 2012 was based on cumulative growth over three years in post tax AOP on
a constant currency basis. This was chosen to incentivise significant growth in operating profit across the Group’s principal business units.
An adjustment to this outcome will be made based on the relative TSR over the three-year period, calculated 50% against the FTSE100 Index
and 50% against the JSE ALSI. This takes into account relative performance against other listed companies. TSR will be averaged at the start
(Q4 2011) and end (Q4 2014) of the three-year performance period.
In addition, discretionary downward adjustments to the formulaic outcome on the AOP metrics will be considered by the Committee where:
■ There are any negative financial impacts or underperformance in the Group not adequately reflected in AOP, giving the Committee
discretion to take broad performance into account; or
■ There is underperformance in the management of Group risk or the agreed risk appetite levels are exceeded. This enables the Committee
to factor in the requirement of the FSA and ABI to take account of company risk as a factor in performance measurement.
110
Old Mutual plcAnnual Report and Accounts 2012 The level at which the awards vest will be determined by reference to the total aggregate AOP in constant currency achieved over the
three-year period, shown in the table below:
AOP targets – aggregated over three years
AOP (£bn)
% Vesting
Multiplied by Relative TSR Performance*
Threshold
Target
Maximum
Threshold
2.9
0%
|–––––––Interpolated–––––––|
Maximum
3.5
100%
Relative TSR vs. index
Multiplier
4% or more below index
equal to index
4% or more above index
0.85
1.00
1.15
*
Relative TSR performance (calculated 50% against the FTSE100 Index and 50% against the JSE ALSI) against the above ranges, with a multiplier being set on a straight-line basis
between the points.
The awards for the executive directors, inclusive of the maximum TSR multiplier above, were equal to 250% of basic salary at the date of award.
The Company undertakes the performance measurement and submits a report to the Committee advising the results for each specific award.
The Committee obtains external audit sign-off from KPMG Audit plc and Strategic Remuneration as part of its oversight procedures.
Directors’ emoluments for 2012
Directors’ emoluments for the year ended 31 December 2012 and the preceding financial year (including in each case emoluments from offices
held with the Company’s subsidiaries where relevant) were as follows:
£000
2011
Total
350
1,539
2,350
93
83
80
382
96
74
–
238
65
Salary and
fees
Short-term
Incentives1
Benefits and
benefit
allowance2
Pension
Total
2012
Chairman
Patrick O’Sullivan
Executive directors
Philip Broadley
Julian Roberts
Non-executive directors
Mike Arnold
Russell Edey
Alan Gillespie
Reuel Khoza3
Roger Marshall
Bongani Nqwababa
Nku Nyembezi-Heita
Lars Otterbeck4
Former non-executive director
Eva Castillo (resigned on 28 February 2013)
Total emoluments
350
580
870
93
88
84
365
96
74
45
152
72
2,869
–
766
1,150
–
–
–
–
–
–
–
–
–
–
221
341
–
–
–
–
–
–
–
–
–
1,916
562
–
–
–
–
–
–
–
–
–
–
–
–
–
350
1,567
2,361
93
88
84
365
96
74
45
152
72
5,347
5,3505
1
2
3
4
5
Short-term incentives are payable 50% in cash and 50% deferred for three years in the form of forfeitable shares awards. The figures quoted represent both elements of the
short-term incentives.
Benefits include cash allowances payable to the executive directors, the cost of providing life cover and disability cover, and travel costs for directors’ spouses to accompany
them to certain Board meetings or other corporate events of the Company and its major subsidiaries. The amount of this expenditure is reported to and considered by the
Committee, and procedures are in place for such costs to be authorised. The Committee is satisfied that such expenditure is reasonable and in the interests of the Company.
Includes fees of £299,000 (£316,000 in 2011) in respect of Nedbank Group Limited.
Includes fees of £80,000 (£166,000 in 2011) in respect of Skandia Insurance Company Limited, Skandiabanken and Skandia Liv.
The prior-year comparative number as published in the Remuneration Report for 2011 was £5,459,000, which included £109,000 paid to the former non-executive directors,
Nigel Andrews and Rudi Bogni.
The executive directors were required to waive fees for non-executive directorships held in subsidiary companies totalling £27,600 during the
year ended 31 December 2012 (2011: £29,100) in favour of the Company or its subsidiaries. These waivers are expected to remain in force in
the future.
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REMUNERATION
REPORT continued
Chairman’s and non-executive directors’ remuneration
The Company’s policy on remuneration for non-executive directors is that this should be:
■ Fee-based
■ Market-related
■ Not linked to share price or Company performance.
The annual fees payable to the Chairman and to other non-executive directors in 2012 and 2013, by role, are set out below:
Chairman
Non-executive directors
Base fee
Senior Independent Director additional fee
Additional fees payable for Committees
Board Risk Committee
Chairman
Member
Group Audit Committee
Chairman
Member
Nomination Committee
Member
Remuneration Committee
Chairman
Member
2013
£
2012
360,000
350,000
57,000
10,000
25,000
8,000
30,000
10,000
55,000
10,000
25,000
8,000
30,000
10,000
3,000
3,000
25,000
8,000
20,000
6,000
None of the non-executive directors of the Company (including the Chairman) contributed to any Group pension fund during 2012 or had any
accrued pension fund benefits in any Group pension fund at 31 December 2012.
Employee share plans
A summary of the employee share plans currently operated by the Company and its wholly-owned subsidiaries can be found on the Old
Mutual plc website.
Change of control
Under the rules of the Company share plans in which the executive directors are participants, in the event of a change of control of Old Mutual plc:
■ Forfeitable shares awards and share options granted under the Old Mutual plc Share Reward Plan (SRP) would vest in full as awards
granted under the SRP represent deferred short-term incentive awards that have already been earned
■ Performance shares and share options granted under the Old Mutual plc Performance Share Plan (PSP) would vest: (i) to the extent that the
performance criteria to which such awards or options are subject have been met; and (ii) on a pro-rata basis to reflect the reduction in the
length of the original performance period, although the Committee does have discretion to disapply the length of service pro-rating for
compassionate reasons
■ Share options granted under the Old Mutual plc 2008 Sharesave Plan (SAYE) would become exercisable to the extent of the
savings accumulated.
The Committee has reviewed the operation of the share incentive schemes, including how discretion is exercised and the grant levels currently
applicable, and considers these to be appropriate to the Company’s circumstances and prospects.
112
Old Mutual plcAnnual Report and Accounts 2012 Employee Share Ownership Trusts
The Group operates a number of Employee Share Ownership Trusts (ESOTs) through which it collateralises some of its obligations under its
employee share plans. At 31 December 2012, 149,255,489 shares in the Company were held in ESOTs as show below, and 119,125,003 shares
in the Company were held under award to be settled by these ESOTs.
Trust
Capital Growth Investment Trust
Mutual & Federal Broad-Based Trust
Mutual & Federal Management Incentive Trust
Mutual & Federal Senior Black Management Trust
Mutual & Federal Namibia Broad-Based Trust
Mutual & Federal Namibia Management Incentive Trust
Mutual & Federal Namibia Senior Black Management Trust
Old Mutual plc Employee Share Trust
OMN Broad-Based Employee Share Trust
OMN Management Incentive Trust
OMSA Broad-Based Employee Share Trust
OMSA Management Incentive Trust
OMSA Share Trust
Total
Country
Old Mutual plc shares held in trust
Zimbabwe
South Africa
South Africa
South Africa
Namibia
Namibia
Namibia
Guernsey
Namibia
Namibia
South Africa
South Africa
South Africa
1,104,238
3,185
15,890,544
4,177,723
2,682
143,842
144,605
34,607,097
443,731
1,316,368
12,753,368
58,543,158
20,124,948
149,255,489
The strategy for all non-Black Economic Empowerment (BEE)-related ESOTs has historically been to ensure that sufficient shares were acquired
to match at least 90% of the obligations of each share incentive grant. However, as a result of the requirements of the Company’s BEE
transactions in South Africa and Namibia, it was necessary to place shares allotted as part of the transactions in the relevant BEE employee
share trusts immediately, in order to cover the total annual share grant allocations likely to be made to black participants in terms of the BEE
transactions up to 2014 and 2016 respectively.
The general practice of the ESOTs (save for BEE-related trusts) is not to vote the shares held at shareholder meetings, although beneficiaries of
restricted share awards or forfeitable shares awards may in principle give directions for those shares to be voted. However, with respect to the
OMSA Broad-Based Employee Share Trust, the OMSA Management Incentive Trust, the OMN Broad-Based Employee Share Trust, the OMN
Management Incentive Trust, the Mutual & Federal Management Incentive Trust, the Mutual & Federal Senior Black Management Trust, the
Mutual & Federal Broad-Based Trust, the Mutual & Federal Namibia Management Incentive Trust, the Mutual & Federal Namibia Senior Black
Management Trust and the Mutual & Federal Namibia Broad-Based Trust, the trustees may, because of BEE considerations, vote any
unallocated shares held in these trusts as well as those shares held in respect of any unexercised share options. The beneficiaries of any
restricted shares allocated by these BEE employee share trusts are entitled to vote their relevant shares.
Share options (excluding nil-cost options) granted under the Old Mutual UK Sharesave Plan, SAYE, the SRP and the PSP are currently intended
to be settled by the issue of new shares rather than using shares held in an ESOT and there were, at 31 December 2012, 17,457,883 such shares
held under option. In respect of the vesting of share options on 8 April 2012, certain unapproved share options originally granted to UK
employees in 2009 were cash-settled on exercise rather than being settled with newly-issued shares.
Dilution limits
For the purposes of calculating dilution limits, any awards that are satisfied by transfer of pre-existing issued shares (such as shares acquired
by market purchase through ESOTs) and any shares comprised in any share option that has lapsed or has been cash-settled are disregarded.
The Company has complied with these limits at all times.
At 31 December 2012, the Company had 1.61% of share capital available under the 5%-in-10-years limit applicable to discretionary share
incentive schemes and 5.83% of share capital available under the 10%-in-10-years limit applicable to all share incentive schemes.
Nedbank Group Limited share incentive schemes
The Company’s separately listed subsidiary, Nedbank Group Limited, has its own share incentive schemes, which are under the control of the
Remuneration Committee of its board and are not further addressed in this report. Neither of the executive directors of the Company has any
interest under any of the Nedbank Group Limited share incentive schemes.
113
How we govern our businessFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business REMUNERATION
REPORT continued
Directors’ interests under employee share plans
The following share options and rights over shares in the Company granted under various employee share schemes were outstanding at
1 January and 31 December 2012 in favour of the executive directors. Those granted during 2012 are highlighted in bold and those vested,
released, exercised or lapsed during 2012 are shown in italics:
Award type and
plan
Reason
for award
Philip Broadley
Shares (SRP)
DSTI1, 2
DSTI1,3,4
DSTI1,3,4
DSTI1,3,4
Option (PSP)
Match5,6
Shares (PSP)
Match5,7
Joining5,7
No
No
No
No
Yes
Yes
Yes
Nil-cost options
(PSP)
Total
Julian Roberts
Shares (SRP)
Option (PSP)
Shares (PSP)
Nil-cost options
OMSIP (PSP)
Perfor-
mance
targets
to be
met
Market
value per
share at
grant (p)
Grant
Date
At
1 Jan 12
Granted
Exercised,
Released,
Lapsed
Share
reduction
as a
result of
consoli-
dation
At
31 Dec 12
Exercise
price per
share (p)
Share
price at
date of
exercise/
release
(p)
Gain
made on
exercise/
release (£)
Exercised
or released
or from
which
exercisable
or
releasable
Expiry or
vesting
date
08-Apr-09
23-Mar-10
11-Apr-11
54.10
125.70
144.70
44,235
262,530
267,969
–
–
–
10-Apr-12
157.10
–
241,411
44,235
–
–
–
–
–
32,817
229,713
33,497
234,472
30,177
211,234
–
–
–
–
150.95
66,773
10-Apr-12
10-Apr-12
–
–
–
–
–
23-Mar-13
23-Mar-13
11-Apr-14
11-Apr-14
– 10-Apr-15 10-Apr-15
08-Apr-09
08-Apr-09
08-Apr-09
54.10
55.78
54.10
442,357
85,805
739,372
Rationalising3,8 Yes
13-May-10
Rationalising3,8 Yes
13-May-10
119.00
119.00
577,732
577,731
Financial
Objectives3,9
Financial
Objectives3,9
Financial
Objectives3,10
Financial
Objectives3,10
Yes
13-May-10
119.00
577,732
Yes
13-May-10
119.00
577,731
Yes
Yes
11-Apr-11
144.70
488,079
11-Apr-11
144.70
488,079
Financial
Objectives3,11 Yes
Financial
Objectives3,11 Yes
10-Apr-12
157.10
10-Apr-12
157.10
–
–
461,490
461,490
442,357
85,805
739,372
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
577,732
577,731
577,732
577,731
488,079
488,079
461,490
461,490
5,129,352
1,164,391 1,311,769
96,491
4,885,483
08-Apr-09
23-Mar-10
11-Apr-11
54.10
125.70
144.70
301,594
378,849
421,597
–
–
–
10-Apr-12
157.10
–
372,315
301,594
–
–
–
–
47,357
331,492
52,700
368,897
46,540
325,775
DSTI1,12
DSTI1,3,4
DSTI1,3,4
DSTI1,3,4
Match5,13
Match5,14
Match5,15
No
No
No
No
Yes
Yes
Yes
08-Apr-09
08-Apr-09
08-Apr-09
54.10
54.10
55.78
2,245,735
2,190,494
860,508
Rationalising3,8 Yes
13-May-10
Rationalising3,8 Yes
13-May-10
119.00
119.00
871,849
871,849
Financial
Objectives3,9
Financial
Objectives3,9
Financial
Objectives3,10
Financial
Objectives3,10
Yes
13-May-10
119.00
871,849
Yes
13-May-10
119.00
871,849
Yes
Yes
11-Apr-11
144.70
734,278
11-Apr-11
144.70
734,278
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,245,735
2,190,494
860,508
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
871,849
871,849
871,849
871,849
734,278
734,278
692,235
692,235
48,906
32.00
54.10
150.95
428,423
10-Apr-12
08-Apr-15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
150.95
129,523
10-Apr-12
10-Apr-12
150.95 1,116,082
10-Apr-12
10-Apr-12
–
–
–
–
–
–
–
–
– 13-May-13
12-May-20
– 13-May-14
12-May-20
– 13-May-13
12-May-20
– 13-May-14
12-May-20
–
11-Apr-14
10-Apr-16
–
11-Apr-15
10-Apr-16
– 10-Apr-15 09-Apr-22
– 10-Apr-16 09-Apr-22
1,740,800
150.95
455,256
10-Apr-12
10-Apr-12
–
–
–
–
–
23-Mar-13
23-Mar-13
11-Apr-14
11-Apr-14
– 10-Apr-15 10-Apr-15
54.10
54.10
157.10 2,313,107
10-Apr-12
08-Apr-15
168.22 2,499,792
09-Aug-12
08-Apr-15
–
–
–
–
–
–
–
–
–
150.95 1,298,937
10-Apr-12
10-Apr-12
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13-May-13
12-May-20
13-May-14
12-May-20
13-May-13
12-May-20
13-May-14
12-May-20
11-Apr-14
11-Apr-16
11-Apr-15
11-Apr-16
– 10-Apr-15 10-Apr-22
– 10-Apr-16 10-Apr-22
–
01-Jun-14
30-Nov-14
Financial
Objectives3,11 Yes
Financial
Objectives3,11 Yes
10-Apr-12
157.10
10-Apr-12
157.10
–
–
692,235
692,235
Option (SAYE)
16
No
09-Apr-09
63.30
48,906
–
Total
11,403,635
1,756,785 5,598,331
146,597
7,415,492
6,567,092
1 Dividends are paid and the directors can vote the shares held under award during the vesting period.
2 On 10 April 2012, 44,235 shares were released to Mr Broadley in respect of the deferred short-term incentive forfeitable shares award granted on 8 April 2009. Mr Broadley
sold all of these shares.
3 Awards are subject to a claw-back provision under which the Committee may reduce the number of shares under option or award if financial results or business performance
for which the director is responsible are found to have been materially incorrect or misleading or if undue risk was taken, resulting in financial loss to the Company.
4 These awards were consolidated on a 7-for-8 basis on 23 April 2012 as a result of the Special Dividend and share consolidation approved by shareholders.
5 As a result of the EPS- and RoE-based performance targets being met, the share options and forfeitable shares awards granted under the PSP on 8 April 2009 vested on
8 April 2012.
6 Mr Broadley exercised these options on 10 April 2012 and retained 174,606 shares.
7 On 10 April 2012, 825,177 shares were released to Mr Broadley in respect of his joining and long-term incentive forfeitable shares awards granted on 8 April 2009.
Mr Broadley sold all of these shares.
8 The Committee concluded that the overall achievement of the OMSIP Rationalising Objectives was 75% and the appropriate number of shares held under option will vest.
9 An overall achievement of 85.9% was determined for the 2010 OMSIP Financial Objectives and the appropriate number of shares held under option will vest.
10 Subject to the fulfilment of performance targets, under which 50% of the award is subject to the financial performance of the Company’s LTS business post restructuring and
50% of the award is subject to absolute TSR.
114
Old Mutual plcAnnual Report and Accounts 2012 Directors’ interests under employee share plans continued
11 Subject to the fulfilment of performance targets based on cumulative growth over three years in AOP on a constant currency basis, subject to adjustments based on the relative
TSR over the three-year period, calculated 50% against the FTSE100 Index and 50% against the JSE ALSI.
12 On 10 April 2012, 301,594 shares were released to Mr Roberts in respect of the deferred short-term incentive forfeitable shares award granted on 8 April 2009. Mr Roberts sold
all of these shares.
13 Mr Roberts exercised these options on 10 April 2012 and retained 55,241 shares.
14 Mr Roberts exercised this option on 9 August 2012 and retained 350,000 shares.
15 On 10 April 2012, 860,508 shares were released to Mr Roberts in respect of his long-term incentive forfeitable shares award granted on 8 April 2009. Mr Roberts sold all of
these shares.
16 The SAYE option price was determined 20% below the average of the Company’s share price between 16 and 18 March 2009. The Company’s share price at the date of grant
(9 April 2009) was 63.3p.
Company share price performance
The market price of the Company’s shares was 178.2p at 31 December 2012 and ranged from a low of 137.8p to a high of 179.6p during 2012.
Executive directors’ shareholding requirements
The Group Chief Executive is expected to build up a holding of shares in the Company equal in value to at least 200% of his basic salary within
five years of appointment and the equivalent figure for other executive directors is 150% of their basic salaries. For the purposes of the
calculations, share options and forfeitable shares awards are excluded.
The following table shows shares owned outright (including holdings by connected persons) and illustrates that both Julian Roberts and
Philip Broadley had met their respective requirements at 31 December 2012:
Julian Roberts
Philip Broadley
Basic salary at
31 Dec 2012
(£)
Price at
31 Dec 2012
(p)
Percentage
holding
required
870,000
580,000
178.2
178.2
200%
150%
Minimum
number of
shares
required
to be held*
976,431
488,215
Shares held at
31 Dec 2012
as a
percentage
of basic salary*
284%
158%
Shares held at
31 Dec 2012
1,385,889
513,434
* Calculated using the market price of Old Mutual plc shares on 31 December 2012, namely 178.2p, and the basic salaries of the executive directors at 31 December 2012.
Further information
Terms of engagement – executive directors
The terms of engagement of the executive directors are considered by the Committee to provide a proper balance of responsibilities and
security between the parties. The following is a summary of the main provisions:
Provision
Contract dates
Notice period
Compensation for loss of office
Service contract
Julian Roberts – 23 January 2009, as amended on 22 November 2011
Philip Broadley – 10 November 2008, as amended on 22 November 2011
Julian Roberts – 12 months by either the Company or the director
Philip Broadley – 12 months by the Company and 6 months by the director
Tailored to reflect the Company’s contractual obligations and the obligation
on the part of the employee to mitigate loss
Compensation payable on early termination
No contractual provision
Terms of engagement – Chairman and non-executive directors
Patrick O’Sullivan entered into an engagement letter with the Company in August 2009 (as amended in December 2011) setting out the terms
applicable to his role as Chairman from January 2010. Under these terms, subject to: (a) 12 months’ notice at any time given by either the
Company or Patrick O’Sullivan, (b) his being duly re-elected at Annual General Meetings, and (c) the provisions of the Company’s Articles of
Association relating to the removal of directors, his appointment was for an initial term of three years, renewable thereafter for a further three
years (subject to the same provisos), followed by up to three additional one-year terms. Mr O’Sullivan’s term of engagement has now been
extended for a second three-year term with effect from 1 January 2013.
The other non-executive directors are engaged on terms that may be terminated by either side without notice. However, it is envisaged that they
will remain in place initially for two successive three-year terms, in order to provide assurance to both the Company and the non-executive
director concerned that the appointment is likely to continue. The renewal of non-executive directors’ terms for successive three-year cycles is
not automatic, with the continued suitability of each non-executive director being assessed by the Nomination Committee. Non-executive
directors’ engagements are extended on an annual basis (for a maximum of three years) from the end of their second three-year cycle.
115
How we govern our businessFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business REMUNERATION
REPORT continued
Terms of engagement – Chairman and non-executive directors continued
All directors (including the executive directors) are required to stand for election or re-election annually at the Company’s Annual General
Meeting. The following table sets out details of where each non-executive director (other than the Chairman) now stands in relation to the
framework of appointment described above:
Mike Arnold
Russell Edey1
Alan Gillespie
Danuta Gray
Reuel Khoza
Roger Marshall
Bongani Nqwababa2
Nku Nyembezi-Heita
Lars Otterbeck1
Date of original
appointment
Date of current
appointment
Current term
as director
1 Sep 2009
24 Jun 2004
3 Nov 2010
1 Mar 2013
27 Jan 2006
5 Aug 2010
1 Apr 2007
9 March 2012
14 Nov 2006
1 Sep 2012
24 Jun 2010
3 Nov 2010
1 Mar 2013
27 Jan 2013
5 Aug 2010
1 Apr 2010
9 March 2012
14 Nov 2012
2nd
3rd (final year)
1st
1st
3rd (2nd year)
1st
2nd
1st
3rd (final year)
Date current
appointment
terminates
1 Sep 2015
9 May 2013
3 Nov 2013
1 Mar 2016
27 Jan 2014
5 Aug 2013
1 Apr 2013
9 March 2015
9 May 2013
1 Russell Edey and Lars Otterbeck will retire at the conclusion of the Company’s Annual General Meeting on 9 May 2013.
2 On 28 February 2013, the Board approved the extension of Bongani Nqwababa’s engagement for a further year from 1 April 2013.
Shareholder approval of the Remuneration Report
An advisory vote on the Remuneration Report will be put to shareholders at the AGM on 9 May 2013.
Russell Edey
Chairman of the Remuneration Committee
On behalf of the Board
1 March 2013
116
Old Mutual plcAnnual Report and Accounts 2012 Index to the fInancIal
statements
For the year ended 31 December 2012
What
we do
Where we
are going
How we
have
performed
Our risks
financials
How we govern our business
118
contents
Statement of directors’ responsibilities
in respect of the Annual Report and
financial statements
Independent Auditor’s report to the
members of Old Mutual plc
Consolidated income statement
Consolidated statement of
comprehensive income
Reconciliation of adjusted
operating profit to profit after tax
Consolidated statement
124
of financial position
Consolidated statement of cash flows 125
Consolidated statement of
changes in equity
119
120
122
126
121
Notes to the consolidated
financial statements
A: Significant accounting policies 130
134
B: Segment information
C:
Other key
performance information
144
D: Other income statement notes 149
E: Financial assets and liabilities 155
F:
Other statement of financial
position notes
188
199
G: Other notes
H:
Discontinued operations and
disposal groups held for sale 210
Financial statements of the Company 212
222
MCEV
F
i
n
a
n
c
i
a
l
s
Group fInancIal statements
statement of dIrectors’
responsIBIlItIes
in respect of the Annual Report and the financial statements
The directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law they
are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected
to prepare the Parent Company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the
state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent
Company financial statements, the directors are required to:
■ Select suitable accounting policies and then apply them consistently
■ Make judgements and estimates that are reasonable and prudent
■ State whether they have been prepared in accordance with IFRSs as adopted by the EU; and
■ Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company
will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s
transactions and disclose with reasonable accuracy, at any time, the financial position of the Parent Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report
and Corporate Governance Statement that comply with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The directors confirm that to the best of their knowledge:
■ The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
■ The Annual Report includes a fair review of the development and performance of the business and the position of Old Mutual plc and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Julian roberts
Group Chief Executive
philip Broadley
Group Finance Director
1 March 2013
118
Old Mutual plcAnnual Report and Accounts 2012 Group fInancIal statements
Independent audItor’s
report to the memBers
of old mutual plc
For the year ended 31 December 2012
We have audited the financial statements of Old Mutual plc for the year ended 31 December 2012 which comprise the Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the
Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity and the
related notes which include the reconciliation of adjusted operating profit to profit after tax. The financial reporting framework that has been
applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards
the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
respective responsibilities of directors and auditors
As explained more fully in the Statement of Directors’ Responsibilities set out on page 118, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the
financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us
to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/auditscopeukprivate.
opinion on financial statements
In our opinion:
■ The financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2012
and of the Group’s profit for the year then ended
■ The Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU
■ The Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
■ The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
■ The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
■ The information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the
financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
■ Adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
■ The Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
■ Certain disclosures of directors’ remuneration specified by law are not made; or
■ We have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
■ The directors’ statement, set out on page 118, in relation to going concern; and
■ The part of the Corporate Governance Statement on page 85 relating to the Company’s compliance with the nine provisions of the UK
Corporate Governance Code specified for our review; and
■ Certain elements of the report to shareholders by the Board on directors’ remuneration.
philip smart (senior statutory auditor)
for and on behalf of KpmG audit plc, statutory auditor
Chartered Accountants
15 Canada Square
London E14 5GL
1 March 2013
119
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
consolIdated Income
statement
For the year ended 31 December 2012
revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Other income
total revenues
expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Other operating and administrative expenses
Goodwill impairment
Change in third-party interest in consolidated funds
total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
(Loss)/profit on acquisition/disposal of subsidiaries, associated undertakings and strategic investments
profit before tax
Income tax expense
profit from continuing operations after tax
Discontinued operations
Profit from discontinued operations after tax
profit after tax for the financial year
Attributable to
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
profit after tax for the financial year
earnings per share
Basic earnings per share based on profit from continuing operations (pence)
Basic earnings per share based on profit from discontinued operations (pence)
Basic earnings per ordinary share (pence)
Diluted earnings per share based on profit from continuing operations (pence)
Diluted earnings per share based on profit from discontinued operations (pence)
diluted earnings per ordinary share (pence)
Weighted average number of ordinary shares (millions)
Year ended
31 december
2012
Year ended
31 December
2011
Notes
£m
B2
D2
D3
D4
D5
D6
D7
D8
D9
C1(b)
G5
C1(c)
D1
H1
F11(a)
F11(a)
C2(a)
C2(a)
C2(a)
3,725
(322)
3,403
9,524
3,431
214
3,096
125
19,793
(5,612)
221
(5,391)
(5,361)
(400)
(214)
(1,887)
(1,031)
(3,754)
–
(328)
(18,366)
24
(56)
1,395
(472)
923
564
1,487
1,173
264
50
1,487
12.6
12.3
24.9
11.6
11.5
23.1
4,587
3,584
(325)
3,259
(567)
3,669
217
3,035
171
9,784
(3,331)
123
(3,208)
1,889
(458)
(58)
(2,095)
(1,007)
(3,852)
(264)
2
(9,051)
10
251
994
(225)
769
198
967
667
238
62
967
8.9
4.0
12.9
8.0
3.7
11.7
4,935
120
Old Mutual plcAnnual Report and Accounts 2012 Group fInancIal statements
consolIdated statement
of comprehensIve Income
For the year ended 31 December 2012
profit after tax for the financial year
other comprehensive income for the financial year
Fair value gains
Property revaluation
Net investment hedge
Available-for-sale investments
Fair value gains/(losses)
Recycled to the income statement
Shadow accounting
Currency translation differences/exchange differences on translating foreign operations
Other movements
Income tax relating to components of other comprehensive income
total other comprehensive income for the financial year from continuing operations
Total other comprehensive income for the financial year from discontinued operations
total other comprehensive income for the financial year
total comprehensive income for the financial year
D1(c)
H1(b)
attributable to
Equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
total comprehensive income for the financial year
£m
Year ended
31 december
2012
Year ended
31 December
2011
Notes
1,487
967
20
160
30
(21)
6
(641)
(46)
5
(487)
(348)
(835)
652
476
126
50
652
39
28
(1)
(6)
(22)
(1,240)
(49)
12
(1,239)
(161)
(1,400)
(433)
(408)
(87)
62
(433)
121
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
reconcIlIatIon of adJusted
operatInG profIt to profIt
after tax
For the year ended 31 December 2012
core operations
Long-Term Savings
Nedbank
Mutual & Federal
USAM
Finance costs
Long-term investment return on excess assets
Net interest payable to non-core operations
Corporate costs
Other net expenses
adjusted operating profit before tax
Adjusting items
Non-core operations
profit before tax (net of policyholder tax)
Income tax attributable to policyholder returns
profit before tax
Total tax expense
profit from continuing operations after tax
Profit from discontinued operations after tax
profit after tax for the financial year
adjusted operating profit after tax attributable to ordinary equity holders of the parent
adjusted operating profit before tax
Tax on adjusted operating profit
adjusted operating profit after tax
Non-controlling interests – ordinary shares
Non-controlling interests – preferred securities
adjusted operating profit after tax attributable to ordinary equity holders of the parent
Adjusted weighted average number of shares (millions)
adjusted operating earnings per share (pence)
Year ended
31 december
2012
Year ended
31 December
2011
Notes
£m
B3
B3
B3
B3
C1(a)
B3
B3
D1(a)
H1(a)
Notes
D1(d)
F11(a)
F11(a)
C2(b)
C2(b)
800
828
43
91
1,762
(130)
54
(18)
(54)
–
1,614
(459)
165
1,320
75
1,395
(472)
923
564
1,487
793
755
89
67
1,704
(128)
37
(23)
(57)
(18)
1,515
(329)
(183)
1,003
(9)
994
(225)
769
198
967
£m
Year ended
31 december
2012
Year ended
31 December
20111
1,614
(441)
1,173
(281)
(50)
842
4,818
17.5
1,515
(341)
1,174
(257)
(62)
855
4,756
18.0
1 The results for the year ended 31 December 2011 have been restated to reflect the share consolidation which occurred on 23 April 2012 (see note A2).
Basis of preparation
Adjusted operating profit (AOP) reflects the directors’ view of the underlying long-term performance of the Group. AOP is a measure of
profitability which adjusts the standard IFRS profit measures for the specific items detailed in note C1, and as such it is a non-GAAP measure.
122
Old Mutual plcAnnual Report and Accounts 2012
This reconciliation explains the differences between adjusted operating profit and profit after tax as reported under IFRS as adopted by the EU.
For core life assurance and general insurance businesses, AOP is based on a long-term investment return, including investment returns on life
funds’ investments in Group equity and debt instruments, and is stated net of income tax attributable to policyholder returns. For the US Asset
Management business it includes compensation costs in respect of certain long-term incentive schemes defined as non-controlling interests in
accordance with IFRS. For all core businesses, AOP excludes goodwill impairment, the impact of acquisition accounting, revaluations of put
options related to long-term incentive schemes, profit/(loss) on acquisition/disposal of subsidiaries, associated undertakings and strategic
investments, and fair value profits/(losses) on certain Group debt movements but includes dividends declared to holders of perpetual preferred
callable securities. Old Mutual Bermuda is treated as a non-core operation in the AOP disclosure, and Nordic, which is disclosed as
discontinued operations for IFRS reporting, is also treated as a non-core operation for AOP disclosure. Non-core operations are not included
in AOP.
Adjusted operating earnings per share is calculated on the same basis as AOP. It is stated after tax attributable to AOP and non-controlling
interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation of the adjusted weighted
average number of shares includes own shares held in policyholders’ funds and Black Economic Empowerment trusts.
123
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
consolIdated statement
of fInancIal posItIon
At 31 December 2012
assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held for sale
total assets
liabilities
Long-term business policyholder liabilities
General insurance liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held for sale
total liabilities
net assets
shareholders’ equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Total non-controlling interests
total equity
at
31 december
2012
At
31 December
2011
Notes
£m
F1
F2
F3
F8
G5
F4
E8
E3
E4
F5
E6
H2
E8
E8
E9
F6
F7
F8
F9
E10
E6
H2
3,056
921
848
1,946
340
137
1,288
1,406
38,495
86,381
103
2,890
1,781
3,863
42
3,358
951
925
2,064
339
111
1,351
989
40,001
81,253
138
3,348
1,795
3,624
22,138
143,497
162,385
80,188
346
2,783
3,050
263
689
400
287
4,789
39,499
1,402
3
76,350
325
1,893
3,656
269
701
504
199
4,243
41,215
1,755
20,417
133,699
9,798
151,527
10,858
F10
7,833
8,488
F11(b)
F11(b)
1,692
273
1,965
9,798
1,652
718
2,370
10,858
The consolidated financial statements on pages 120 to 211 were approved by the Board of directors on 1 March 2013.
Julian roberts
Group Chief Executive
philip Broadley
Group Finance Director
124
Old Mutual plcAnnual Report and Accounts 2012 Group fInancIal statements
consolIdated statement
of cash flows
For the year ended 31 December 2012
cash flows from operating activities – continuing operations
Profit before tax
Non-cash movements in profit before tax
Changes in working capital
Taxation paid
net cash inflow from operating activities – continuing operations
cash flows from investing activities
Net (acquisitions)/disposals of financial investments
Acquisition of investment properties
Proceeds from disposal of investment properties
Acquisition of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of intangible assets
Acquisition of interests in subsidiaries, associated undertakings and strategic investments
Disposal of interests in subsidiaries, associated undertakings and strategic investments
net cash inflow/(outflow) from investing activities – continuing operations
cash flows from financing activities
Dividends paid to
Ordinary equity holders of the Company
Non-controlling interests and preferred security interests
Interest paid (excluding banking interest paid)
Proceeds from issue of ordinary shares (including by subsidiaries to non-controlling interests)
Net disposal/(acquisition) of treasury shares
Issue of subordinated and other debt
Subordinated and other debt repaid
net cash outflow from investing activities – continuing operations
net increase/(decrease) in cash and cash equivalents – continuing operations
Net (decrease)/increase in cash and cash equivalents – discontinued operations
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at beginning of the year
cash and cash equivalents at end of the year
consisting of
Cash and cash equivalents in the statement of financial position
Mandatory reserve deposits with central banks
Cash and cash equivalents included in assets held for sale
total
Year ended
31 december
2012
£m
Year ended
31 December
2011
1,395
249
1,041
(295)
2,390
(1,531)
(55)
67
(120)
7
(72)
(23)
1,883
156
(1,172)
(211)
(85)
35
19
290
(1,293)
(2,417)
129
(129)
(271)
5,055
4,784
3,863
921
–
4,784
994
1,372
(1,415)
(402)
549
43
(57)
6
(184)
43
(91)
103
(329)
(466)
(97)
(206)
(87)
10
(17)
890
(905)
(412)
(329)
346
(594)
5,632
5,055
3,624
951
480
5,055
Cash flows presented in this statement include all cash flows relating to policyholders’ funds for life assurance.
Except for mandatory reserve deposits with central banks of £921 million (2011: £951 million) and cash and cash equivalents subject to
consolidation of funds of £679 million (2011: £756 million), management do not consider that there are any material amounts of cash and cash
equivalents which are not available for use in the Group’s day-to-day operations. Mandatory reserve deposits are, however, included in cash
and cash equivalents for the purposes of the cash flow statement in line with market practice in South Africa.
Included within the above is interest income received (including banking interest) of £4,490 million (2011: £4,936 million), dividend income
received of £508 million (2011: £371 million) and interest paid (including banking interest) of £2,047 million (2011: £2,143 million).
125
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
consolIdated statement
of chanGes In equItY
For the year ended 31 December 2012
Year ended 31 december 2012
Notes
shareholders’ equity at beginning of the year
profit after tax for the financial year
other comprehensive income
Fair value gains/(losses)
Property revaluation
Net investment hedge1
Available-for-sale investments
Fair value gains
Recycled to the income statement
Exchange differences recycled to the income statement1
Shadow accounting
Currency translation differences/exchange differences on
translating foreign operations
Other movements
Income tax relating to components of other comprehensive income
total comprehensive income for the financial year
Dividends for the year
Other movements in share capital and share-based
D1(c)
C3
payment reserve
Cancellation of treasury shares
Share consolidation
Preferred securities purchased
Merger reserve realised in the period
Change in participation in subsidiaries
transactions with shareholders
millions
number of
shares
issued and
fully paid
5,801
–
share
capital
share
premium
580
–
805
–
merger
reserve
2,532
–
–
–
–
–
–
–
–
–
–
–
–
27
(239)
(697)
–
–
–
(909)
–
–
–
–
–
–
–
–
–
–
–
3
(24)
–
–
–
–
(21)
–
–
–
–
–
–
–
–
–
–
–
30
–
–
–
–
–
30
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(815)
–
(815)
available-
for-sale
reserve
property
revaluation
reserve
share-based
payments
reserve
other
reserves
translation
reserve
53
–
–
–
33
(21)
–
6
–
–
(6)
12
–
–
–
–
–
–
–
–
shareholders’ equity at end of the year
4,892
559
835
1,717
65
1
Following the sale of the Nordic business on 21 March 2012, foreign exchange translation gains of £350 million relating to the Nordic operations, and foreign exchange
hedge losses of £112 million relating to net investment hedges in respect of the Nordic investment were recognised in the income statement. These amounts are included in the
£564 million profit on sale.
124
–
19
–
20
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
144
230
–
–
–
–
–
–
–
–
(24)
–
(24)
–
62
–
–
–
–
–
62
268
5
–
–
–
–
–
–
–
–
4
–
4
–
–
24
–
–
–
–
24
33
retained
earnings
3,170
1,141
perpetual
preferred
callable
securities
attributable
to equity
holders of
the parent
688
32
8,488
1,173
total
non-
controlling
interests
2,370
314
–
–
–
–
–
–
–
(40)
–
1,101
(1,172)
7
–
–
(13)
815
–
(363)
3,908
19
160
33
(21)
(350)
6
(489)
(59)
4
476
102
(19)
–
–
–
–
(1,214)
–
–
–
–
–
–
–
–
10
42
(42)
–
–
–
(6)
–
–
(48)
682
1
–
1
–
–
–
(150)
10
–
176
(169)
13
–
–
–
20
(445)
(1,131)
7,833
(581)
1,965
301
–
–
160
(350)
(489)
(679)
–
–
–
–
–
–
–
–
–
–
–
–
–
(378)
£m
total
equity
10,858
1,487
20
160
34
(21)
(350)
6
(639)
(49)
4
652
(1,383)
115
–
–
(464)
–
20
(1,712)
9,798
126
Old Mutual plcAnnual Report and Accounts 2012 Year ended 31 december 2012
Notes
shareholders’ equity at beginning of the year
profit after tax for the financial year
other comprehensive income
Fair value gains/(losses)
Property revaluation
Net investment hedge1
Available-for-sale investments
Fair value gains
Recycled to the income statement
Exchange differences recycled to the income statement1
Shadow accounting
Currency translation differences/exchange differences on
translating foreign operations
Other movements
Income tax relating to components of other comprehensive income
D1(c)
total comprehensive income for the financial year
Dividends for the year
Other movements in share capital and share-based
C3
payment reserve
Cancellation of treasury shares
Share consolidation
Preferred securities purchased
Merger reserve realised in the period
Change in participation in subsidiaries
transactions with shareholders
shareholders’ equity at end of the year
millions
number of
shares
issued and
fully paid
5,801
–
share
capital
share
premium
580
–
805
–
merger
reserve
2,532
available-
for-sale
reserve
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27
(239)
(697)
3
(24)
30
(909)
4,892
(21)
559
30
835
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(815)
(815)
1,717
53
–
–
–
33
(21)
–
6
–
–
(6)
12
–
–
–
–
–
–
–
–
65
property
revaluation
reserve
share-based
payments
reserve
124
–
230
–
19
–
–
–
–
–
–
1
–
20
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(24)
–
(24)
–
62
–
–
–
–
–
62
144
268
other
reserves
translation
reserve
5
–
–
–
–
–
–
–
–
4
–
4
–
–
24
–
–
–
–
24
33
301
–
–
160
–
–
(350)
–
(489)
–
–
(679)
–
–
–
–
–
–
–
–
(378)
retained
earnings
3,170
1,141
perpetual
preferred
callable
securities
attributable
to equity
holders of
the parent
688
32
8,488
1,173
total
non-
controlling
interests
2,370
314
–
–
–
–
–
–
–
(40)
–
1,101
(1,172)
7
–
–
(13)
815
–
(363)
3,908
–
–
–
–
–
–
–
–
10
42
(42)
–
–
–
(6)
–
–
(48)
682
19
160
33
(21)
(350)
6
(489)
(59)
4
476
(1,214)
102
–
–
(19)
–
–
(1,131)
7,833
1
–
1
–
–
–
(150)
10
–
176
(169)
13
–
–
(445)
–
20
(581)
1,965
£m
total
equity
10,858
1,487
20
160
34
(21)
(350)
6
(639)
(49)
4
652
(1,383)
115
–
–
(464)
–
20
(1,712)
9,798
1
Following the sale of the Nordic business on 21 March 2012, foreign exchange translation gains of £350 million relating to the Nordic operations, and foreign exchange
hedge losses of £112 million relating to net investment hedges in respect of the Nordic investment were recognised in the income statement. These amounts are included in the
£564 million profit on sale.
Retained earnings were reduced in respect of own shares held in policyholders’ funds, ESOP trusts, Black Economic Empowerment trusts and
other undertakings at 31 December 2012 by £489 million (2011: £501 million).
127
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
consolIdated statement
of chanGes In equItY
For the year ended 31 December 2012
Year ended 31 December 2011
Notes
shareholders’ equity at beginning of the year
profit after tax for the financial year
other comprehensive income
Fair value gains/(losses)
Property revaluation
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to the income statement
Realised on disposal
Exchange differences realised on disposal
Shadow accounting
Currency translation differences/exchange differences on
translating foreign operations
Other movements
Income tax relating to components of other comprehensive income
total comprehensive income for the financial year
Dividends for the year
Other movements in share capital and share-based
D1(c)
C3
payment reserve
Merger reserve realised in the year
Change in participation in subsidiaries
Reclassification of translation differences on
non-controlling interests
Shares issued in lieu of cash dividend
transactions with shareholders
shareholders’ equity at end of the year
Millions
Number of
shares
issued and
fully paid
5,695
–
–
–
–
–
–
–
–
–
–
–
–
–
7
–
–
–
99
106
5,801
Share
capital
570
–
Share
premium
795
–
Merger
reserve
2,845
–
Available-
for-sale
reserve
225
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10
10
580
–
–
–
–
–
–
–
–
–
–
–
–
10
–
–
–
–
10
805
–
–
–
–
–
–
–
–
–
–
–
–
–
(313)
–
–
–
(313)
2,532
–
–
51
(10)
(157)
–
(58)
–
–
2
(172)
–
–
–
–
–
–
–
53
Property
revaluation
reserve
Share-based
payments
reserve
215
Other
reserves
Translation
reserve
Retained
earnings
2,331
635
Perpetual
preferred
callable
securities
688
32
Attributable
to equity
holders of
the parent
8,951
667
Total
non-
controlling
interests
2,523
300
101
–
30
(7)
23
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
124
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
(34)
(35)
50
50
230
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
1,176
–
–
28
24
(970)
(918)
–
–
–
–
–
–
–
–
–
–
43
–
43
301
–
–
–
–
–
–
–
–
–
–
–
15
650
(221)
(17)
313
114
189
3,170
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12
44
(44)
(44)
688
30
28
51
(11)
(157)
24
(65)
(970)
(19)
14
(408)
(265)
43
–
–
43
124
(55)
8,488
9
–
(1)
–
–
–
–
(313)
(20)
–
(25)
(162)
16
–
61
(43)
–
(128)
2,370
£m
Total
equity
11,474
967
39
28
50
(11)
(157)
24
(65)
(1,283)
(39)
14
(433)
(427)
59
–
61
–
124
(183)
10,858
128
Old Mutual plcAnnual Report and Accounts 2012 Year ended 31 December 2011
Notes
shareholders’ equity at beginning of the year
profit after tax for the financial year
other comprehensive income
Fair value gains/(losses)
Property revaluation
Net investment hedge
Available-for-sale investments
Fair value gains
Recycled to the income statement
Realised on disposal
Exchange differences realised on disposal
Shadow accounting
Currency translation differences/exchange differences on
translating foreign operations
Other movements
Income tax relating to components of other comprehensive income
D1(c)
total comprehensive income for the financial year
Dividends for the year
payment reserve
Other movements in share capital and share-based
C3
Merger reserve realised in the year
Change in participation in subsidiaries
Reclassification of translation differences on
non-controlling interests
Shares issued in lieu of cash dividend
transactions with shareholders
shareholders’ equity at end of the year
Millions
Number of
shares
issued and
fully paid
5,695
Share
capital
570
Share
premium
795
Merger
reserve
2,845
Available-
for-sale
reserve
225
–
–
–
–
–
–
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
51
(10)
(157)
–
(58)
(172)
–
–
–
–
–
2
–
–
–
–
–
–
–
10
(313)
99
106
5,801
10
10
580
10
805
(313)
2,532
53
Property
revaluation
reserve
Share-based
payments
reserve
Other
reserves
Translation
reserve
101
–
30
–
–
–
–
–
(7)
–
–
–
23
–
–
–
–
–
–
–
124
215
–
–
–
–
(1)
–
–
–
–
(34)
–
(35)
–
50
–
–
–
–
50
230
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5
1,176
–
–
28
–
–
–
24
–
(970)
–
–
(918)
–
–
–
–
43
–
43
301
Retained
earnings
2,331
635
Perpetual
preferred
callable
securities
688
32
Attributable
to equity
holders of
the parent
8,951
667
Total
non-
controlling
interests
2,523
300
–
–
–
–
–
–
–
–
15
–
650
(221)
(17)
313
–
–
114
189
3,170
–
–
–
–
–
–
–
–
–
12
44
(44)
–
–
–
–
–
(44)
688
30
28
51
(11)
(157)
24
(65)
(970)
(19)
14
(408)
(265)
43
–
–
43
124
(55)
8,488
9
–
(1)
–
–
–
–
(313)
(20)
–
(25)
(162)
16
–
61
(43)
–
(128)
2,370
£m
Total
equity
11,474
967
39
28
50
(11)
(157)
24
(65)
(1,283)
(39)
14
(433)
(427)
59
–
61
–
124
(183)
10,858
129
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
A: Significant accounting policies
a1: Basis of preparation
Statement of compliance
Old Mutual plc (the Company) is a company incorporated in England and Wales.
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’) and equity account
the Group’s interest in associates and jointly controlled entities (other than those held by life assurance funds which are accounted for as
investments). The Parent Company financial statements present information about the Company as a separate entity and not about the Group.
Both the Parent Company financial statements and the Group financial statements have been prepared and approved by the directors in
accordance with International Financial Reporting Standards as adopted by the EU. On publishing the Parent Company financial statements
here together with the Group financial statements, the Company is taking advantage of the exemption in section 408 of the Companies Act
2006 not to present its individual income statement and related notes that form a part of these approved financial statements.
The accounting policies adopted by the Company and Group, unless otherwise stated, have been applied consistently to all periods presented
in these consolidated financial statements.
The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value:
derivative financial instruments, financial assets and liabilities designated as fair value through the income statement or as available-for-sale,
owner-occupied property and investment property. Non-current assets and disposal groups held for sale are stated at the lower of the
previous carrying amount and the fair value less costs to sell.
The Parent Company financial statements are prepared in accordance with these accounting policies, other than for investments in subsidiary
undertakings and associates, which are stated at cost less impairments (see note E1(n)), in accordance with IAS 27.
The Company and Group financial statements have been prepared on the going concern basis which the directors believe to be appropriate
having taken into consideration the points as set out in the Directors’ Report in the section headed Going concern.
Judgements made by the directors in the applications of these accounting policies that have a significant effect on the financial statements, and
estimates with a significant risk of material adjustment in the next year, are discussed in note A3.
Translation of foreign operations
The assets and liabilities of foreign operations are translated from their respective functional currencies into the Group’s presentation currency
using the year-end exchange rates, and their income and expenses using the average exchange rates. Other than in respect of cumulative
translation gains and losses up to 1 January 2004, cumulative unrealised gains or losses resulting from translation of functional currencies to the
presentation currency are included as a separate component of shareholders’ equity. To the extent that these gains and losses are effectively
hedged, the cumulative effect of such gains and losses arising on the hedging instruments are also included in that component of shareholders’
equity. Upon the disposal of subsidiaries the cumulative amount of exchange differences deferred in shareholders’ equity, net of attributable
amounts in relation to net investments, is recognised in the income statement. Cumulative translation gains and losses up to 1 January 2004,
being the effective date of the Group’s conversion to IFRS, were reset to zero.
The principal exchange rates used to translate the operating results, assets and liabilities of key foreign business segments to pounds sterling are:
Rand
US dollars
Swedish kronor
Euro
Year ended 31 december 2012
statement
of financial
position
(closing rate)
Income
statement
(average rate)
Year ended 31 December 2011
Statement
of financial
position
(closing rate)
Income
statement
(average rate)
13.0123
1.5850
10.7363
1.2326
13.7696
1.6242
10.5638
1.2307
11.6445
1.6037
10.4144
1.1519
12.5643
1.5553
10.6801
1.1970
Developments during 2012
Other than changes arising from new accounting developments as mentioned in note A5, the Group has not made any changes to the
accounting policies during the year. Disclosures about the impact of future standards can be found in note A6.
These financial statements describe the material accounting policies and those which involve significant judgement, optionality in application
and are material to the Group’s overall financial statements. As such items which are immaterial or duplicated elsewhere in the Annual Report
have been removed from these financial statements.
A detailed list of the Group’s accounting policies can be found at www.oldmutual.com. The contents of the website are not subject to audit.
130
Old Mutual plcAnnual Report and Accounts 2012 a2: significant corporate activity and business changes
Disposal of Nordic
As previously reported the Group had agreed at 31 December 2011 to the disposal of its life assurance operations, asset management and
banking operations in Sweden, Denmark and Norway to Skandia Liv. Following final regulatory approval on 8 March 2012 and subsequent
shareholder approval, the sale was completed on 21 March 2012. The sale represented the Group’s exit from the life assurance market in the
Nordic region and therefore met the criteria of a discontinued operation. The assets and liabilities of Nordic were classified as non-current
assets and liabilities held for sale at 31 December 2011. At 31 December 2012, following the completion of the disposal, there are no assets
and liabilities of Nordic remaining in the Statement of Financial Position. For the purposes of adjusted operating profit, Nordic is classified
as a non-core operation. Further details of the impact of discontinued operations are provided in note H1.
Special dividend and share consolidation
On 9 March 2012 the Group declared a special dividend of 18p per 10p ordinary share to all holders of those shares on the register at 20 April
2012 and the dividend was subsequently paid on 7 June 2012. A seven-for-eight share consolidation was effected on 23 April 2012 and from
that date only new ordinary shares of 113⁄ 7 pence have been in issue. For basic and diluted earnings per share, the weighted average number
of shares is adjusted with effect from 23 April 2012. For adjusted operating earnings per share the adjustment of the weighted average number
of shares has been made effective 1 January 2012. Consequently the comparative information in the adjusted operating earnings per share
note C2(b) has been restated accordingly.
Disposal of Finnish branch in Old Mutual Wealth
On 21 December 2011 the Group announced that it had agreed terms to sell the Finnish branch of Old Mutual Wealth to OP-Pohjola osk. The
assets and liabilities of the Finnish branch were classified as non-current assets and liabilities held for sale in the Statement of Financial Position
at 31 December 2011. As at 31 December 2012, following the completion of the sale of the business on 31 August 2012, there were no assets
and liabilities of the Finland branch remaining in the Statement of Financial Position.
Consolidation of other African businesses
As reported in the Group’s 2011 Annual Report and Accounts the Group’s operations in Zimbabwe, Kenya, Malawi, Swaziland and Nigeria
(the other African businesses), were consolidated effective from 1 January 2011. The net asset value of the underlying businesses on 1 January
2011 was deemed to be the fair value of these operations on that date. As a result of the consolidation of these businesses, the Group
recognised a gain on 1 January 2011, which was disclosed as a profit on acquisition of subsidiaries. The results of the other African businesses
were included in the comparatives for the year-ended 31 December 2011.
In anticipation of the indigenisation of the Zimbabwe business a non-controlling interest adjustment has been included for this operation in
respect of adjusted operating profit to reflect the agreed indigenous shareholding to be provided. At 31 December 2012 the Group had
completed the transfer of the agreed indigenous shareholding to approved indigenisation and economic empowerment trusts, the majority of
which remains fully consolidated for the purposes of IFRS reporting.
Reporting of Retail Europe within Old Mutual Wealth
On 24 January 2012 the Group announced that it would combine its Old Mutual Wealth Continental Europe business (France and Italy) with the
Skandia Retail Europe business unit (Germany, Austria, Poland and Switzerland). As a result of these operational changes, the businesses
previously reported as the Retail Europe segment are now reported within the Old Mutual Wealth segment for the year ended
31 December 2012. The comparative information for the year ended 31 December 2011 has been reclassified where applicable.
Integration of OMAM UK with Skandia Investment Group
On 26 April 2012 the Group announced the integration of Old Mutual Asset Management UK (OMAM UK) with Skandia Investment Group.
OMAM UK was previously reported within the US Asset Management segment and Skandia Investment Group is reported within the Old Mutual
Wealth segment. Consequently OMAM UK is included within the Old Mutual Wealth segment for the year ended 31 December 2012.
In September 2012 the Group announced the merger of the Skandia businesses (Skandia UK, Skandia International, Old Mutual Global
Investors and the Skandia European businesses outside of the Nordic region) into a single business called Old Mutual Wealth. The operational
changes are designed to combine asset management capability with UK platform strength and international expertise to grow into a leading
provider of wealth management solutions in selected markets. As a result the businesses previously reported as the Retail Europe segment are
now reported within the Old Mutual Wealth segment for the year ended 31 December 2012. The comparative information for the year ended
31 December 2011 has been reclassified where applicable.
Cancellation of treasury shares
On 13 January 2012 the Group announced that it had cancelled 239,434,888 ordinary shares of 10p each previously held in treasury.
Repayment of debt
On 18 January 2012, the remaining €200 million of the €750 million subordinated bond was repaid on the first call date.
Following an open market tender offer on 19 July 2012, the Group announced it repurchased £388 million of the £500 million senior bond with
a repayment date of 1 August 2012.
On 23 August 2012, the Group announced it had applied to repay the US$750 million subordinated cumulative perpetual notes at their
nominal value. The transaction was completed on 24 September 2012.
On 4 December 2012, €5 million of the €500 million perpetual preferred callable securities and on 5 December 2012, £2 million of the
£350 million preferred callable securities were acquired, both via open market repurchase.
131
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
A: Significant accounting policies continued
a3: critical accounting estimates and judgements
In the preparation of these financial statements, the Group is required to make estimates and judgements that affect items reported in the
consolidated income statement, statement of financial position, other primary statements and related supporting notes.
Critical accounting estimates and judgements are those which involve the most complex or subjective judgements or assessments. Where
applicable the Group applies estimation and assumption setting techniques that are aligned with relevant actuarial and accounting guidance
based on knowledge of the current situation, and require assumptions and predictions of future events and actions. There have been no
significant methodology changes to the critical accounting estimates and judgements that the Group applied at 31 December 2011. The
significant accounting policies are described in the relevant notes.
The key areas of the Group’s business that typically require such estimates and the relevant accounting policies and notes are as follows:
area
Financial assets and liabilities
Life assurance contract provisions
Deferred acquisition costs
Intangible assets and goodwill
Tax
More detail
Policy note
E4
E8
F4
F1
D1/F8
E1
E8
E8
F1
A3(c)
Specific areas that have required closer attention in respect of the estimates and judgements during the year ended 31 December 2012 are
explained in more detail below:
(a) Loans and advances
Provisions for impairment of loans and advances
The majority of loans and advances are in respect of Nedbank, which assesses its loan portfolios for impairment at each financial reporting
date. Nedbank actively manages their exposure to loans and advances through robust credit approval processes which contributed to the
improved credit loss ratio at 31 December 2012 of 1.05% (2011: 1.13%).
The impairment for performing loans is calculated on a portfolio basis, based on historical loss ratios, adjusted for national and industry
specific economic conditions and other indicators present at the reporting date that correlate with defaults on the portfolio.
These include early arrears and other indicators of potential default, such as changes in macro economic conditions and legislation affecting
credit recovery. These annual loss ratios are applied to loan balances in the portfolio and scaled to the estimated loss emergence period.
For portfolios which comprise large numbers of small homogenous assets with similar risk characteristics where credit scoring techniques are
generally used, statistical techniques are used to calculate impairment allowances on the portfolio, based on historical recovery rates and
assumed emergence periods. There are many models in use, each tailored to a product, line of business or client category. Judgement and
knowledge are needed in selecting the statistical methods to use when the models are developed or revised.
For larger exposures impairment allowances are calculated on an individual basis and all relevant considerations that have a bearing on the
expected future cash flows are taken into account. The level of impairment allowance is the difference between the value of the discounted
expected future cash flows and its carrying amount. Subjective judgements are made in the calculations of future cash flows and change with
time as new information becomes available or as strategies evolve, resulting in frequent revisions to the impairment provision as individual
decisions are taken.
Further detail is provided in note E3.
(b) Policyholder liabilities
Emerging Markets Financial Soundness Valuation discount rate
The calculation of the Group’s South African Life assurance contract provisions is sensitive to the discount rate applied to future liabilities. The
methodology applied by the Group requires discount rates to be set according to the Financial Soundness Valuation (FSV) principles as
prescribed by the Actuarial Society of South Africa. In line with these principles the reference rate is selected as the Bond Exchange of South
Africa (BESA) par bond 10-year yield.
During 2012 the reference discount rate applied to its South African business reduced from 8.2% to 6.9% in line with observable market data.
During H1 2012, the discount rate reduced from 8.2% to 7.6%, which resulted in an increase in FSV provisions of £20 million. During H2 2012,
the discount rate reduced further from 7.6% to 6.9%, resulting in a further increase to FSV provisions of £15 million.
During the fourth quarter of 2012 a broad duration-based hedge was implemented which partially mitigated the negative impact of the decline
in the FSV rate over H2. This hedge remains in place and is expected to reduce the South African business’s sensitivity to interest rate movements
in future. The Group estimates that a 1% reduction in the discount rate will result in an increase in policyholder liabilities of £39 million
(2011: £42 million), allowing for the impact of the duration-based hedge. The growth in the book over 2012 and the fact that a 1% fall now
represents a larger proportionate fall in interest rates mean that the sensitivity at the end of 2012 is higher than the actual impact observed
over 2012.
Further disclosure of the policyholder sensitivity to interest rates is noted in note E8(g).
132
Old Mutual plcAnnual Report and Accounts 2012 Emerging Markets discretionary reserves
Management has discretion in managing exposure to financial options and guarantees, particularly within participating business. As required
by applicable Actuarial Society of South Africa guidance, the time value of the financial options and guarantees included in the statutory
reserves in the Emerging Markets businesses at 31 December 2012, has been valued using a risk-neutral market consistent asset model and is
referred to as the Investment Guarantee Reserve (IGR). This reserve includes a discretionary margin as defined by local guidelines to allow for
the sensitivity of the reserve to future interest rate and equity market movements. Further detail is provided in the Old Mutual audited market
consistent embedded value (MCEV) supplementary basis information section of the Annual Report.
Old Mutual Bermuda guarantees
Old Mutual Bermuda was closed to new business on 18 March 2009. Management’s key priority since the closure to new business has
been to de-risk the business. The main risks associated with this business relate to guarantees in the products previously sold by the business.
At 31 December 2012 a total of 21,975 (2011: 34,828) contracts remain active, comprising 20,910 variable annuity products (2011: 33,373) and
1,065 deferred and fixed index annuity investments (2011: 1,455). The variable annuity products provided both a guaranteed minimum
accumulation benefit (GMAB) and guaranteed minimum death benefit (GMDB).
During 2012 the business experienced significantly higher rates of surrender than assumed, with 12,380 variable annuity contracts surrendering
in total (2011: 5,657). The increase in surrender activity was attributable to variable annuity UGO policyholders passing through a top-up
process on the fifth anniversary following product inception. At 31 December 2012 approximately 70% of variable annuity UGO policyholders
had reached their 5-year top-up. At 31 December 2012, 77% of non-Hong Kong policies and 57% of Hong Kong policies had been
surrendered on or after their 5-year anniversary date. The significantly reduced size of the book has meant that associated GMAB reserves
have reduced from $1,056 million at 31 December 2011 to $229 million at 31 December 2012 while the associated GMDB reserves reduced
from $5 million to $155,677.
The favourable lapse experience has been reflected in surrender assumptions for the remaining policies that are yet to go through their 5-year
policy anniversary. These revised assumptions have resulted in further releases of reserves, contributing positively to IFRS and MCEV operating
profits for 2012. Policies still in force after the 5-year anniversary are no longer subject to surrender penalties.
The Group continues to operate strong oversight over the business. The key remaining risk relates to the 10-year GMAB top-up process which
will commence in 2017.
(c) Tax
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to
the extent that it relates to items recognised directly in other comprehensive income, in which case it is correspondingly recognised in other
comprehensive income.
The Group is regularly in discussion with the respective tax authorities in each of the jurisdictions where the Group is active. In certain
circumstances the Group applies its judgement to determine if a provision for future tax should be raised. The Group reviews any potential
exposure to tax authorities under the requirements of IAS 37 to determine if a provision should be recognised. The measurement of any
provisions for future taxes is based on the Group’s assessment of the specific circumstances and it applies judgement to determine the most
likely outcome of its discussions with the relevant tax authorities. As these provisions are based on estimates and rely on judgements made
by the Group, the actual amount of future taxes paid by the Group could be different to the amounts provided.
a4: liquidity analysis of the statement of financial position
The Group’s statement of financial position is in order of liquidity as is permitted by IAS 1 ‘Presentation of Financial Statements’. In order to
satisfy the requirements of IAS 1, the following analysis is given to describe how statement of financial position lines are categorised between
current and non-current balances, applying the principles laid out in IAS 1.
The following statement of financial position captions are generally classified as current – cash and cash equivalents, non-current assets held
for sale, client indebtedness for acceptances, current tax receivable, third-party interests in the consolidation of funds, current tax payable,
liabilities under acceptances and non-current liabilities held for sale. The following balances are generally classified as non-current – goodwill
and other intangible assets, mandatory reserve deposits with central banks, property, plant and equipment, investment property, deferred tax
assets, investments in associated undertakings and jointly controlled operations, deferred acquisition costs, deposits held with reinsurers,
provisions, deferred revenue and deferred tax liabilities.
The following balances include both current and non-current portions – reinsurers’ shares of life assurance and general insurance business
policyholder liabilities, loans and advances, investments and securities, other assets, derivative financial assets and liabilities, life assurance and
general insurance policyholder liabilities, borrowed funds, amounts owed to bank depositors and other liabilities. The split between the current
and non-current portions for these assets and liabilities is given either by way of a footnote to the relevant note to the accounts or by way of a
maturity analysis (in respect of major financial liability captions).
a5: standards, amendments to standards, and interpretations adopted in the 2012 annual financial statements
The following standards, amendments to standards and interpretations, which are relevant to the Group, have been adopted in these financial
statements:
■ IFRS 7 Disclosures – Transfers of Financial Assets (Amendments to IFRS 7) was issued in October 2010. The amendments to IFRS 7 Financial
Instruments: Disclosures require enhancements to the existing disclosures where an asset is transferred but is not derecognised and introduce
new disclosures for assets that are derecognised but the entity continues to have a continuing exposure to the asset after the sale. These
amendments are effective for annual periods beginning on or after 1 July 2011. Early application of the amendments is permitted. The adoption
of this standard had no significant impact on the Group’s disclosures.
133
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
A: Significant accounting policies continued
a5: standards, amendments to standards, and interpretations adopted in the 2012 annual financial statements continued
■ Amendment to IAS 12 ‘Deferred Tax: Recovery of Underlying Assets’ (effective 1 January 2012) introduced an exception to the measurement
principles of deferred tax assets and liabilities arising from investment property measured using the fair value model in accordance with IAS
40 Investment Property. The adoption of this amendment allows the Group to measure deferred tax in Investment Property on the assumption
that the carrying value will be recovered principally through sale. The adoption of these amendments had no material impact on the Group’s
financial statements.
a6: future standards, amendments to standards, and interpretations not early-adopted in the 2012 annual financial statements
At the date of authorisation of these financial statements the following standards, amendments to standards, and interpretations, which are
relevant to the Group, have been issued by the International Accounting Standards Board, although the EU has not yet endorsed all of them.
■ IFRS 9 ‘Financial Instruments’ (effective 1 January 2015) is a new standard on financial instruments that will eventually replace IAS 39. The
published standard introduces changes to the current IAS 39 rules for classification and measurement of financial assets. Under IFRS 9 there
will be two measurement bases for financial assets, amortised cost and fair value. Financial assets at fair value will be recorded at fair value
through the income statement with a limited opportunity to record changes in fair value of certain equity instruments through other
comprehensive income. The main impact for the Group will be the reclassification of the Old Mutual Bermuda business’ bond portfolios
from ‘available-for-sale’ (fair value changes through other comprehensive income) to amortised cost or fair value through the income
statement. Financial liabilities are excluded from the scope of the standard. The Group is currently assessing the full impacts of the standard
on its financial statements. The standard has not yet been endorsed by the European Union
■ IFRS 10 ‘Consolidated Financial Statements’ (effective 1 January 2014); IFRS 11 ‘Joint Arrangements’ (effective 1 January 2014); IFRS 12
‘Disclosures of interests in other entities’ (effective 1 January 2014). These standards all relate to how the Group will account for its interests in
subsidiaries, joint ventures and associates, together with new disclosures regarding these investments. The most significant impact is expected
from IFRS 10 which provides a revised principle of when the Group controls another entity. The Group is currently assessing the full impacts
of these standards
■ IFRS 13 ‘Fair Value Measurement’ (effective 1 January 2013) is a new standard providing principles on the determination of fair value. The
Group is currently assessing the full impact of this standard
■ Amendments to IAS 1 ‘Presentation of Items of Other Comprehensive Income’ (effective 1 July 2012) require that an entity present separately
the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. This
amendment is not expected to have significant impact on the Group financial statements
■ Amendments to IAS 19 ‘Defined Benefit Plans’ (effective 1 January 2013) require immediate recognition of actuarial gains and losses in other
comprehensive income and eliminate the corridor method. The Group is currently assessing the full impact of this amendment.
B: Segment information
B1: Basis of segmentation
The Group’s segmental results are analysed and reported on a basis consistent with the way that management and the Board of directors assesses
performance and allocates resources. Information is presented to the Board on a consolidated basis in pounds sterling (the presentational
currency) and in functional currency of each business.
Adjusted operating profit is one of the key measures reported to the Group’s management and Board of directors for their consideration in the
allocation of resources to and the review of performance of the segments. The Group utilises additional measures to assess the performance
of each of the segments, in particular the level of net client cash flows and funds under management. Additional performance measures
considered by management and the Board of directors in assessing the performance of the segments can be found in the MCEV
supplementary information.
A reconciliation between the segment revenues and expenses and the Group’s revenues and expenses is shown in note B3. In line with internal
reporting, assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments
where appropriate and where there is a reasonable basis for doing so. The Group accounts for inter-segment revenues and transfers as if
the transactions were with third parties at current market prices. Given the nature of the operations, there are no major customers within any
of the segments.
The revenues generated in each reported segment can be seen in the analysis of profits and losses in note B3. The segmental information in
notes B3 and B4, reflects the adjusted and IFRS measures of profit and loss, assets and liabilities for each operating segment as provided to
management and the Board of directors. There are no differences between the measurement of the assets and liabilities reflected in the
primary statements and that reported for the segments.
134
Old Mutual plcAnnual Report and Accounts 2012 There are four principal business activities from which the Group generates revenues. These are life assurance (premium income), asset
management business (fee and commission income), banking (banking interest receivable) and general insurance (premium income).
The lines of business from which each operating segment derives its revenues are as follows:
Core operations
Long-Term Savings
Emerging Markets – life assurance and asset management
Old Mutual Wealth – life assurance and asset management
Other core operations
Nedbank – banking and asset management
Mutual & Federal – general insurance
US Asset Management – asset management
Discontinued and non-core operations
Old Mutual Bermuda – life assurance (non-core)
Nordic – life assurance, asset management and banking (discontinued and non-core)
Income statement segmentation
For both reported periods:
■ Nordic has been classified as a discontinued operation in the IFRS income statement and its results as non-core in determining the Group’s
adjusted operating profits; and
■ Old Mutual Bermuda has been classified as a continuing operation in the IFRS income statement, but as non-core in determining the Group’s
adjusted operating profit.
US Life is classified as a discontinued operation in the comparative period.
All other businesses have been classified as continuing operations for both reported periods.
The results of OMAM (UK) (previously included within US Asset Management) and Retail Europe are included within the Old Mutual Wealth
segment for the year ended 31 December 2012. Except for OMAM (UK), the income statement segmental presentation for the year ended
31 December 2011 is consistent with the above.
Statement of financial position segmentation
At 31 December 2011, the assets and liabilities of Nordic were classified as non-current assets and liabilities held for sale. Following disposal
of the business during 2012, no assets and liabilities remain at 31 December 2012.
The segmental analysis of the statement of financial position at 31 December 2012 and 31 December 2011 discloses Old Mutual Bermuda
as non-core.
At 31 December 2011, the assets and liabilities of the Finnish branch were classified as non-current assets and liabilities held for sale.
Following disposal of the business during 2012, no assets and liabilities remain at 31 December 2012.
B2: Gross earned premiums and deposits to investment contracts
Year ended 31 december 2012
Life assurance – insurance contracts
Life assurance – investment contracts with discretionary
participation features
General insurance
Gross earned premiums
life assurance – other investment contracts
recognised as deposits
emerging
markets
old mutual
wealth
long-term
savings
1,673
362
2,035
970
–
2,643
–
–
970
–
362
3,005
2,022
5,699
7,721
Year ended 31 December 2011
Life assurance – insurance contracts
Life assurance – investment contracts with discretionary
participation features
General insurance
Gross earned premiums
Emerging
Markets
1,567
975
–
2,542
Old Mutual
Wealth
Long-Term
Savings
304
1,871
–
–
304
975
–
2,846
Life assurance – other investment contracts recognised
as deposits
2,088
6,406
8,494
m&f
–
–
720
720
–
M&F
–
–
736
736
–
old mutual
Bermuda
–
–
–
–
–
Old Mutual
Bermuda
2
–
–
2
–
£m
total
2,035
970
720
3,725
7,721
£m
Total
1,873
975
736
3,584
8,494
135
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
B: Segment information continued
B3: adjusted operating profit statement – segment information year ended 31 december 2012
long-term savings
Notes
emerging
markets
old mutual
wealth
total
long-term
savings
nedbank
m&f
usam
other
consolidation
adjustments
adjusted
operating
profit
adjusting
items
(note c1)
discontinued
and non-core
operations1
revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Other income
Inter-segment revenues
total revenues
expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Other expenses
Goodwill impairment
Change in third-party interest in consolidated funds
Income tax attributable to policyholder returns
Inter-segment expenses
total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on acquisition/disposal of subsidiaries, associated undertakings and
strategic investments
adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items net of tax and non-controlling interests
profit/(loss) after tax from continuing operations
Profit from discontinued operations after tax
profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
C1(b)
G5
C1(c)
D1
F11(a)
C1(a)
H1
2,643
(82)
2,561
5,288
–
–
440
61
83
8,433
(4,813)
89
(4,724)
(1,756)
–
–
–
(233)
(1,066)
–
–
(49)
(20)
(7,848)
20
–
605
(164)
(9)
432
(153)
279
–
279
362
(87)
275
3,806
–
–
1,199
26
3
5,309
(387)
59
(328)
(3,605)
–
–
–
(677)
(446)
–
–
(26)
(32)
(5,114)
–
–
195
(43)
–
152
(134)
18
–
18
3,005
(169)
2,836
9,094
–
–
1,639
87
86
13,742
(5,200)
148
(5,052)
(5,361)
–
–
–
(910)
(1,512)
–
–
(75)
(52)
(12,962)
20
–
800
(207)
(9)
584
(287)
297
–
297
1
Non-core operations relates to Old Mutual Bermuda with the exception of £4 million of inter-segment revenue and the profit from discontinued operations after tax, with these
reflecting the results of Nordic which has been classified as discontinued operations as detailed in notes A2 and B1. Old Mutual Bermuda profit after tax for the year ended
31 December 2012 was £161 million. Further detail on the results of discontinued operations is provided in note H1.
Of the total revenues, excluding inter company revenues, £4,190 million was generated in the UK (2011: £1,492 million), £1,191 million in the rest
of Europe (2011: £81 million), £13,739 million in southern Africa (2011: £11,007 million), £590 million in United States (2011: £201 million) and
£83 million relates to other operating segments (2011: £80 million).
136
75
366
(191)
135
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,431
214
1,084
23
21
4,773
(400)
(1,886)
(1,601)
(58)
(3,945)
828
(222)
(287)
319
16
335
–
335
720
(153)
567
44
–
–
26
1
18
656
(485)
73
(412)
–
–
–
–
–
–
–
2
–
(107)
(82)
(14)
(615)
43
(9)
(8)
26
(15)
11
–
11
423
82
19,887
(267)
421
–
–
–
1
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
2
–
(5)
(329)
(334)
91
(15)
–
76
(10)
66
–
66
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
–
–
–
–
–
(130)
(68)
(32)
(230)
(148)
12
(27)
(163)
(102)
(265)
–
(265)
(156)
211
(34)
(5)
–
(328)
–
156
(211)
–
–
–
–
–
2
(1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,725
(322)
3,403
9,580
3,431
214
3,172
111
(24)
(5,685)
221
(5,464)
(5,361)
(400)
(130)
(1,886)
(1,056)
(3,597)
–
(328)
(75)
–
(18,297)
24
–
1,614
(441)
(331)
842
(398)
444
–
444
(76)
–
–
–
–
–
–
–
–
–
–
–
–
(84)
(1)
88
(139)
–
–
75
–
(61)
–
(56)
(384)
(31)
17
(398)
398
–
–
–
£m
Ifrs
Income
statement
3,725
(322)
3,403
9,524
3,431
214
3,096
125
–
19,793
(5,612)
221
(5,391)
(5,361)
(400)
(214)
(1,887)
(1,031)
(3,754)
(328)
–
–
-
24
(56)
(18,366)
(472)
(314)
609
–
609
564
1,173
–
–
–
–
–
–
14
24
173
73
–
73
–
–
–
–
(63)
(18)
–
–
–
–
(8)
–
–
–
–
–
165
165
564
729
165
1,395
Old Mutual plcAnnual Report and Accounts 2012 B: Segment information continued
B3: adjusted operating profit statement – segment information year ended 31 december 2012
revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Other income
Inter-segment revenues
total revenues
expenses
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Change in third-party interest in consolidated funds
Income tax attributable to policyholder returns
Other expenses
Goodwill impairment
Inter-segment expenses
total expenses
strategic investments
Income tax expense
Non-controlling interests
Share of associated undertakings’ and joint ventures’ profit after tax
Loss on acquisition/disposal of subsidiaries, associated undertakings and
adjusted operating profit/(loss) before tax and non-controlling interests
adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items net of tax and non-controlling interests
profit/(loss) after tax from continuing operations
Profit from discontinued operations after tax
profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
C1(b)
G5
C1(c)
D1
F11(a)
C1(a)
H1
1,199
1,639
8,433
5,309
13,742
2,643
(82)
2,561
5,288
–
–
440
61
83
(4,813)
89
(4,724)
(1,756)
–
–
–
(233)
(1,066)
–
–
(49)
(20)
20
–
605
(164)
(9)
432
(153)
279
–
279
362
(87)
275
3,806
–
–
26
3
(387)
59
(328)
(3,605)
–
–
–
(677)
(446)
–
–
(26)
(32)
–
–
195
(43)
–
152
(134)
18
–
18
3,005
(169)
2,836
9,094
–
–
87
86
(5,200)
148
(5,052)
(5,361)
–
–
–
(910)
(1,512)
–
–
(75)
(52)
20
–
800
(207)
(9)
584
(287)
297
–
297
(7,848)
(5,114)
(12,962)
1
Non-core operations relates to Old Mutual Bermuda with the exception of £4 million of inter-segment revenue and the profit from discontinued operations after tax, with these
reflecting the results of Nordic which has been classified as discontinued operations as detailed in notes A2 and B1. Old Mutual Bermuda profit after tax for the year ended
31 December 2012 was £161 million. Further detail on the results of discontinued operations is provided in note H1.
Of the total revenues, excluding inter company revenues, £4,190 million was generated in the UK (2011: £1,492 million), £1,191 million in the rest
of Europe (2011: £81 million), £13,739 million in southern Africa (2011: £11,007 million), £590 million in United States (2011: £201 million) and
£83 million relates to other operating segments (2011: £80 million).
long-term savings
Notes
emerging
markets
old mutual
wealth
total
long-term
savings
nedbank
m&f
usam
other
consolidation
adjustments
adjusted
operating
profit
adjusting
items
(note c1)
discontinued
and non-core
operations1
–
–
–
–
3,431
214
1,084
23
21
4,773
–
–
–
–
(400)
–
(1,886)
–
(1,601)
–
–
–
(58)
(3,945)
–
–
828
(222)
(287)
319
16
335
–
335
720
(153)
567
44
–
–
26
1
18
656
(485)
73
(412)
–
–
–
–
(107)
(82)
–
–
–
(14)
(615)
2
–
43
(9)
(8)
26
(15)
11
–
11
–
–
–
1
–
–
421
1
–
423
–
–
–
–
–
–
–
(5)
(329)
–
–
–
–
(334)
2
–
91
(15)
–
76
(10)
66
–
66
–
–
–
75
–
–
–
–
7
82
–
–
–
–
–
(130)
–
–
(68)
–
–
–
(32)
(230)
–
–
(148)
12
(27)
(163)
(102)
(265)
–
(265)
–
–
–
366
–
–
2
(1)
(156)
211
–
–
–
–
–
–
–
(34)
(5)
–
(328)
–
156
(211)
–
–
–
–
–
–
–
–
–
–
3,725
(322)
3,403
9,580
3,431
214
3,172
111
(24)
19,887
(5,685)
221
(5,464)
(5,361)
(400)
(130)
(1,886)
(1,056)
(3,597)
–
(328)
(75)
–
(18,297)
24
–
1,614
(441)
(331)
842
(398)
444
–
444
–
–
–
(191)
–
–
(76)
–
–
(267)
–
–
–
–
–
(84)
(1)
88
(139)
–
–
75
–
(61)
–
(56)
(384)
(31)
17
(398)
398
–
–
–
–
–
–
135
–
–
–
14
24
173
73
–
73
–
–
–
–
(63)
(18)
–
–
–
–
(8)
–
–
165
–
–
165
–
165
564
729
£m
Ifrs
Income
statement
3,725
(322)
3,403
9,524
3,431
214
3,096
125
–
19,793
(5,612)
221
(5,391)
(5,361)
(400)
(214)
(1,887)
(1,031)
(3,754)
–
(328)
–
-
(18,366)
24
(56)
1,395
(472)
(314)
609
–
609
564
1,173
137
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
B: Segment information continued
B3: adjusted operating profit statement – segment information year ended 31 december 2011
Long-Term Savings
Notes
Emerging
Markets
Old Mutual
Wealth
Total
Long-Term
Savings
Nedbank
M&F
USAM
Other
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(note C1)
Discontinued
and non-core
operations1
£m
IFRS
Income
statement
revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Other income
Inter-segment revenues
total revenues
expenses
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Other operating and administrative expenses
Goodwill impairment
Change in third-party interest in consolidated funds
Income tax attributable to policyholder returns
Inter-segment expenses
total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Profit on disposal of subsidiaries, associated undertakings and strategic investments
adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items net of tax and non-controlling interests
profit/(loss) after tax from continuing operations
Profit from discontinued operations after tax
profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
C1(b)
G5
C1(c)
D1
F11(a)
C1(a)
H1
2,542
(88)
2,454
2,626
–
–
411
68
66
5,625
(2,854)
73
(2,781)
(925)
–
–
–
(223)
(1,076)
–
–
(53)
(7)
(5,065)
10
–
570
(120)
(3)
447
126
573
–
573
304
(88)
216
(2,878)
–
–
1,183
23
11
(1,445)
(102)
9
(93)
2,814
(1)
–
–
(664)
(404)
–
–
62
(46)
1,668
–
–
223
(26)
–
197
(87)
110
–
110
2,846
(176)
2,670
(252)
–
–
1,594
91
77
4,180
(2,956)
82
(2,874)
1,889
(1)
–
–
(887)
(1,480)
–
–
9
(53)
(3,397)
10
–
793
(146)
(3)
644
39
683
–
683
1 Non-core operations relates to Old Mutual Bermuda with the exception of £22 million and £5 million of inter-segment revenue and expenses and the profit from discontinued
operations after tax, with these reflecting the results of Nordic and US Life both of which have been classified as discontinued operations. More detail is provided in notes
A2 and B1. Old Mutual Bermuda loss after tax for the year ended 31 December 2011 was £201 million. Further detail on the results of discontinued operations is provided
in note H1.
138
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,669
217
1,051
50
27
5,014
(457)
(2,091)
(9)
(1,641)
(61)
(4,259)
755
(188)
(269)
298
16
314
–
314
736
(149)
587
54
–
–
34
–
18
693
(422)
41
(381)
–
–
–
–
–
–
–
(109)
(95)
(19)
(604)
–
–
89
(22)
(8)
59
(24)
35
–
35
447
10
1
458
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(12)
(379)
(391)
–
–
67
(8)
–
59
(260)
(201)
–
(201)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(128)
(81)
(48)
(257)
(189)
23
(39)
(205)
27
(178)
–
(178)
52
30
(241)
(210)
16
68
(185)
(155)
10,258
(332)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
(24)
(8)
185
155
3,582
(325)
3,257
(116)
3,669
217
3,126
151
(46)
(3,378)
123
(3,255)
1,889
(458)
(128)
(2,091)
(1,041)
(3,684)
–
2
9
4
(8,753)
10
–
1,515
(341)
(319)
855
(202)
653
–
653
(91)
–
–
–
–
–
–
–
–
–
–
–
–
70
(4)
104
(154)
(264)
–
(9)
–
(257)
–
251
(338)
117
19
(202)
202
–
–
–
2
–
2
–
–
–
20
46
(142)
47
–
47
–
–
–
–
(70)
(14)
–
–
–
(4)
(41)
–
–
(1)
–
(183)
(184)
–
(184)
198
14
3,584
(325)
3,259
(567)
3,669
217
3,035
171
–
9,784
(3,331)
123
(3,208)
1,889
(458)
(58)
(2,095)
(1,007)
(3,852)
(264)
2
–
–
(9,051)
10
251
994
(225)
(300)
469
–
469
198
667
Old Mutual plcAnnual Report and Accounts 2012 B: Segment information continued
B3: adjusted operating profit statement – segment information year ended 31 december 2011
revenue
Gross earned premiums
Outward reinsurance
Net earned premiums
Investment return (non-banking)
Banking interest and similar income
Other income
Inter-segment revenues
total revenues
expenses
Banking trading, investment and similar income
Fee and commission income, and income from service activities
Claims and benefits (including change in insurance contract provisions)
Reinsurance recoveries
Net claims and benefits incurred
Change in investment contract liabilities
Losses on loans and advances
Finance costs (including interest and similar expenses)
Banking interest payable and similar expenses
Fee and commission expenses, and other acquisition costs
Other operating and administrative expenses
Goodwill impairment
Change in third-party interest in consolidated funds
Income tax attributable to policyholder returns
Inter-segment expenses
total expenses
Share of associated undertakings’ and joint ventures’ profit after tax
Profit on disposal of subsidiaries, associated undertakings and strategic investments
adjusted operating profit/(loss) before tax and non-controlling interests
Income tax expense
Non-controlling interests
adjusted operating profit/(loss) after tax and non-controlling interests
Adjusting items net of tax and non-controlling interests
profit/(loss) after tax from continuing operations
Profit from discontinued operations after tax
profit/(loss) after tax attributable to equity holders of the parent
B2
D2
D3
D4
D5
D6
D7
D8
D9
C1(b)
G5
C1(c)
D1
F11(a)
C1(a)
H1
5,625
(1,445)
2,542
(88)
2,454
2,626
–
–
411
68
66
(2,854)
73
(2,781)
(925)
–
–
–
–
–
(223)
(1,076)
(53)
(7)
(5,065)
10
–
570
(120)
(3)
447
126
573
–
573
304
(88)
216
(2,878)
–
–
1,183
23
11
(102)
9
(93)
2,814
(1)
–
–
(664)
(404)
62
(46)
1,668
–
–
–
–
223
(26)
–
197
(87)
110
–
110
2,846
(176)
2,670
(252)
–
–
1,594
91
77
4,180
(2,956)
82
(2,874)
1,889
(887)
(1,480)
(1)
–
–
–
–
9
(53)
(3,397)
10
–
793
(146)
(3)
644
39
683
–
683
1 Non-core operations relates to Old Mutual Bermuda with the exception of £22 million and £5 million of inter-segment revenue and expenses and the profit from discontinued
operations after tax, with these reflecting the results of Nordic and US Life both of which have been classified as discontinued operations. More detail is provided in notes
A2 and B1. Old Mutual Bermuda loss after tax for the year ended 31 December 2011 was £201 million. Further detail on the results of discontinued operations is provided
in note H1.
Long-Term Savings
Notes
Emerging
Markets
Old Mutual
Wealth
Total
Long-Term
Savings
Nedbank
M&F
USAM
Other
Consolidation
adjustments
Adjusted
operating
profit
Adjusting
items
(note C1)
Discontinued
and non-core
operations1
£m
IFRS
Income
statement
–
–
–
–
3,669
217
1,051
50
27
5,014
–
–
–
–
(457)
–
(2,091)
(9)
(1,641)
–
–
–
(61)
(4,259)
–
–
755
(188)
(269)
298
16
314
–
314
736
(149)
587
54
–
–
34
–
18
693
(422)
41
(381)
–
–
–
–
(109)
(95)
–
–
–
(19)
(604)
–
–
89
(22)
(8)
59
(24)
35
–
35
–
–
–
–
–
–
447
10
1
458
–
–
–
–
–
–
–
(12)
(379)
–
–
–
–
(391)
–
–
67
(8)
–
59
(260)
(201)
–
(201)
–
–
–
52
–
–
–
–
16
68
–
–
–
–
–
(128)
–
–
(81)
–
–
–
(48)
(257)
–
–
(189)
23
(39)
(205)
27
(178)
–
(178)
–
–
–
30
–
–
–
–
(185)
(155)
–
–
–
–
–
–
–
(24)
(8)
–
2
–
185
155
–
–
–
–
–
–
–
–
–
–
3,582
(325)
3,257
(116)
3,669
217
3,126
151
(46)
10,258
(3,378)
123
(3,255)
1,889
(458)
(128)
(2,091)
(1,041)
(3,684)
–
2
9
4
(8,753)
10
–
1,515
(341)
(319)
855
(202)
653
–
653
–
–
–
(241)
–
–
(91)
–
–
(332)
–
–
–
–
–
70
(4)
104
(154)
(264)
–
(9)
–
(257)
–
251
(338)
117
19
(202)
202
–
–
–
2
–
2
(210)
–
–
–
20
46
(142)
47
–
47
–
–
–
–
(70)
(14)
–
–
–
(4)
(41)
–
–
(183)
(1)
–
(184)
–
(184)
198
14
3,584
(325)
3,259
(567)
3,669
217
3,035
171
–
9,784
(3,331)
123
(3,208)
1,889
(458)
(58)
(2,095)
(1,007)
(3,852)
(264)
2
–
–
(9,051)
10
251
994
(225)
(300)
469
–
469
198
667
139
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
B: Segment information continued
B4: statement of financial position – segment information at 31 december 2012
long-term savings
Notes
emerging
markets
old mutual
wealth
total
long-term
savings
nedbank
m&f
usam
other
consolidation
adjustments
non-core
operations
old mutual
Bermuda
assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
total assets
liabilities
Life assurance policyholder liabilities
General insurance liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held for sale
Inter-segment liabilities
total liabilities
net assets
equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
F1
F2
F3
F8
G5
F4
E8(a)
E3
E4
F5
E6
H2
E8
E8
E9
F6
F7
F8(b)
F9
E10
E6
H2
F10
F11(b)
F11(b)
98
–
336
1,588
82
57
103
55
142
31,157
16
697
612
816
–
562
36,321
31,124
–
–
218
148
11
122
198
2,221
86
377
–
216
34,721
1,600
1,586
14
14
–
1,594
–
13
–
44
–
1,159
1,236
180
45,402
64
333
–
576
5
101
50,707
46,455
–
–
–
54
667
189
39
669
–
–
–
587
48,660
2,047
2,047
–
–
–
1,692
–
349
1,588
126
57
1,262
1,291
322
76,559
80
1,030
612
1,392
5
663
87,028
77,579
–
–
218
202
678
311
237
2,890
86
377
–
803
83,381
3,647
3,633
14
14
–
total equity
1,600
2,047
3,647
The net assets of Emerging Markets are stated after eliminating investments in Group equity and debt instruments of £364 million
(2011: £368 million) held in policyholder funds. These include investments in the Company’s ordinary shares and subordinated liabilities
and preferred securities issued by the Group’s banking subsidiary Nedbank Limited. All Emerging Markets debt relates to life assurance.
All other debt relates to other shareholders’ net assets.
140
534
921
465
15
29
49
–
15
38,173
6,303
18
674
1,003
1,049
37
111
49,396
907
–
–
2,163
1
1
44
9
1,076
39,413
977
3
596
45,190
4,206
2,309
1,897
1,624
273
4,206
14
–
20
–
20
2
18
100
–
397
5
92
–
109
–
43
820
346
–
–
–
30
10
21
127
–
–
–
–
2
536
284
261
23
23
–
284
816
–
13
–
162
3
8
–
–
37
–
121
–
131
–
21
10
–
–
–
1
–
–
6
–
–
–
203
554
774
538
507
31
31
–
538
–
–
1
–
2
–
–
–
26
368
–
62
97
379
–
–
–
–
659
29
–
24
34
70
–
8
–
922
1,746
555
555
–
–
–
555
343
1,765
316
51
678
–
(2,877)
276
2,783
331
–
39
–
(2,877)
276
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£m
total
3,056
921
848
1,946
340
137
1,288
1,406
38,495
86,381
103
2,890
1,781
3,863
42
–
80,188
346
2,783
3,050
263
689
400
287
4,789
39,499
1,402
3
–
–
–
–
–
1
–
–
–
–
–
952
595
18
125
–
673
–
–
–
–
–
–
1
–
1
–
–
92
1,796
568
133,699
9,798
568
–
–
–
7,833
1,965
1,692
273
568
9,798
1,312
1,366
2,301
2,364
143,497
1,702
Old Mutual plcAnnual Report and Accounts 2012 B: Segment information continued
B4: statement of financial position – segment information at 31 december 2012
long-term savings
Notes
emerging
markets
old mutual
wealth
total
long-term
savings
nedbank
m&f
usam
other
consolidation
adjustments
non-core
operations
old mutual
Bermuda
assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
total assets
liabilities
Life assurance policyholder liabilities
General insurance liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held for sale
Inter-segment liabilities
total liabilities
net assets
equity
Non-controlling interests
Ordinary shares
Preferred securities
total equity
E8(a)
F1
F2
F3
F8
G5
F4
E3
E4
F5
E6
H2
E8
E8
E9
F6
F7
F8(b)
F9
E10
E6
H2
F11(b)
F11(b)
98
–
336
1,588
82
57
103
55
142
16
697
612
816
–
562
–
–
218
148
11
122
198
86
377
–
216
14
14
–
31,157
45,402
76,559
36,321
50,707
87,028
31,124
46,455
77,579
2,221
2,890
34,721
1,600
587
48,660
2,047
83,381
3,647
1,594
–
13
–
44
–
1,159
1,236
180
64
333
–
576
5
101
–
–
–
54
667
189
39
669
–
–
–
–
–
–
1,692
–
349
1,588
126
57
1,262
1,291
322
80
1,030
612
1,392
5
663
–
–
218
202
678
311
237
86
377
–
803
14
14
–
Equity attributable to equity holders of the parent
F10
1,586
2,047
3,633
The net assets of Emerging Markets are stated after eliminating investments in Group equity and debt instruments of £364 million
(2011: £368 million) held in policyholder funds. These include investments in the Company’s ordinary shares and subordinated liabilities
and preferred securities issued by the Group’s banking subsidiary Nedbank Limited. All Emerging Markets debt relates to life assurance.
All other debt relates to other shareholders’ net assets.
1,600
2,047
3,647
534
921
465
15
29
49
–
15
38,173
6,303
18
674
1,003
1,049
37
111
49,396
907
–
–
2,163
1
1
44
9
1,076
39,413
977
3
596
45,190
4,206
2,309
1,897
1,624
273
4,206
14
–
20
–
20
2
18
100
–
397
5
92
–
109
–
43
820
–
346
–
–
30
10
21
–
127
–
–
–
2
536
284
261
23
23
–
284
816
–
13
–
162
3
8
–
–
37
–
121
–
131
–
21
1,312
–
–
–
10
1
–
–
6
203
–
–
–
554
774
538
507
31
31
–
538
–
–
1
–
2
26
–
–
–
368
–
62
97
379
–
1,366
2,301
–
–
–
659
29
–
24
34
70
–
8
–
922
1,746
555
555
–
–
–
555
–
–
–
343
–
–
–
–
–
1,765
–
316
51
678
–
(2,877)
276
–
–
2,783
–
–
–
–
–
331
–
39
–
(2,877)
276
–
–
–
–
–
–
£m
total
3,056
921
848
1,946
340
137
1,288
1,406
38,495
86,381
103
2,890
1,781
3,863
42
–
–
–
–
–
1
–
–
–
–
952
–
595
18
125
–
673
2,364
143,497
1,702
–
–
–
–
–
–
1
92
–
1
–
–
1,796
568
568
–
–
–
80,188
346
2,783
3,050
263
689
400
287
4,789
39,499
1,402
3
–
133,699
9,798
7,833
1,965
1,692
273
568
9,798
141
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
B: Segment information continued
B4: statement of financial position – segment information at 31 december 2011
assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
total assets
liabilities
Life assurance policyholder liabilities
General insurance liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held for sale
Inter-segment liabilities
total liabilities
net assets
equity
Equity attributable to equity holders of the parent
Non-controlling interests
Ordinary shares
Preferred securities
Notes
F1
F2
F3
F8
G5
F4
E8(a)
E3
E4
F5
E6
H2
E8
E8
E9
F6
F7
F8(b)
F9
E10
E6
H2
F10
F11(b)
F11(b)
Long-Term Savings
Emerging
Markets
Old Mutual
Wealth
Total
Long-Term
Savings
Nedbank
M&F
USAM
Other
Consolidation
adjustments
Non-core
operations
Old Mutual
Bermuda
Discontinued
operations
104
–
374
1,666
81
32
113
31
299
30,064
10
711
298
339
–
1,025
35,147
30,270
–
–
239
137
17
185
120
1,667
–
230
–
141
33,006
2,141
2,144
(3)
(3)
–
1,756
–
16
–
65
–
1,164
844
190
41,508
70
310
–
516
1,161
138
47,738
42,159
–
–
–
64
673
189
39
673
–
–
1,120
462
45,379
2,359
2,359
–
–
–
1,860
–
390
1,666
146
32
1,277
875
489
71,572
80
1,021
298
855
1,161
1,163
82,885
72,429
–
–
239
201
690
374
159
2,340
–
230
1,120
603
78,385
4,500
4,503
(3)
(3)
–
total equity
2,141
2,359
4,500
1,711
10,858
142
557
951
502
49
21
49
–
16
39,511
6,403
56
943
1,022
1,071
1
206
51,358
2,273
815
–
–
–
1
93
10
1,123
41,215
1,103
–
501
47,134
4,224
2,347
1,877
1,605
272
4,224
23
–
21
–
14
1
16
98
1
2
75
–
416
113
–
23
803
325
–
–
–
32
10
13
–
108
–
–
–
2
490
313
294
19
19
–
313
1,492
904
–
11
–
165
2
9
–
–
41
–
126
–
197
16
21
–
–
–
11
3
–
–
(3)
–
–
8
219
598
836
656
625
31
31
–
656
13
–
1
–
(8)
27
–
–
–
–
54
86
216
467
–
1,136
1,992
1,133
–
–
–
33
–
24
32
96
–
3
–
1,451
2,772
(780)
(1,226)
446
–
446
(780)
349
874
293
388
756
–
(3,155)
(495)
1,893
348
419
(3,155)
(495)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
49
1,731
836
165
566
3,350
3,106
1
–
–
–
1
–
–
–
–
1
–
–
–
–
–
–
–
1
9
–
–
–
–
3,116
234
234
–
–
–
234
£m
Total
3,358
951
925
2,064
339
111
1,351
989
40,001
81,253
138
3,348
1,795
3,624
22,138
–
162,385
76,350
325
1,893
3,656
269
701
504
199
4,243
41,215
1,755
20,417
–
151,527
10,858
8,488
2,370
1,652
718
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20,960
40
21,000
19,289
19,289
1,711
1,711
Old Mutual plcAnnual Report and Accounts 2012 B: Segment information continued
B4: statement of financial position – segment information at 31 december 2011
Long-Term Savings
Notes
Emerging
Markets
Old Mutual
Wealth
Total
Long-Term
Savings
Nedbank
M&F
USAM
Other
Consolidation
adjustments
Non-core
operations
Old Mutual
Bermuda
Discontinued
operations
assets
Goodwill and other intangible assets
Mandatory reserve deposits with central banks
Property, plant and equipment
Investment property
Deferred tax assets
Investments in associated undertakings and joint ventures
Deferred acquisition costs
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Current tax receivable
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Non-current assets held for sale
Inter-segment assets
total assets
liabilities
Life assurance policyholder liabilities
General insurance liabilities
Third-party interests in consolidated funds
Borrowed funds
Provisions
Deferred revenue
Deferred tax liabilities
Current tax payable
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Non-current liabilities held for sale
Inter-segment liabilities
total liabilities
net assets
equity
Non-controlling interests
Ordinary shares
Preferred securities
total equity
E8(a)
F1
F2
F3
F8
G5
F4
E3
E4
F5
E6
H2
E8
E8
E9
F6
F7
F8(b)
F9
E10
E6
H2
F11(b)
F11(b)
30,270
42,159
72,429
104
–
374
1,666
81
32
113
31
299
10
711
298
339
–
30,064
1,025
35,147
–
–
239
137
17
185
120
230
–
–
141
1,667
33,006
2,141
(3)
(3)
–
1,756
–
16
–
65
–
1,164
844
190
41,508
70
310
–
516
1,161
138
47,738
–
–
–
64
673
189
39
673
–
–
1,120
462
45,379
2,359
–
–
–
1,860
–
390
1,666
146
32
1,277
875
489
71,572
80
1,021
298
855
1,161
1,163
82,885
–
–
239
201
690
374
159
2,340
–
230
1,120
603
78,385
4,500
(3)
(3)
–
2,141
2,359
4,500
Equity attributable to equity holders of the parent
F10
2,144
2,359
4,503
557
951
502
49
21
49
–
16
39,511
6,403
56
943
1,022
1,071
1
206
51,358
815
–
–
2,273
–
1
93
10
1,123
41,215
1,103
–
501
47,134
4,224
2,347
1,877
1,605
272
4,224
23
–
21
–
14
1
16
98
1
416
2
75
–
113
–
23
803
–
325
–
–
32
10
13
–
108
–
–
–
2
490
313
294
19
19
–
313
904
–
11
–
165
2
9
–
–
41
–
126
–
197
16
21
1,492
–
–
–
11
3
–
–
(3)
219
–
–
8
598
836
656
625
31
31
–
656
13
–
1
–
(8)
27
–
–
–
216
–
54
86
467
–
1,136
1,992
–
–
–
1,133
33
–
24
32
96
–
3
–
1,451
2,772
(780)
(1,226)
446
–
446
(780)
–
–
–
349
–
–
–
–
–
874
–
293
388
756
–
(3,155)
(495)
–
–
1,893
–
–
–
–
–
348
–
419
–
(3,155)
(495)
–
–
–
–
–
–
1
–
–
–
1
–
49
–
–
1,731
–
836
1
165
–
566
3,350
3,106
–
–
–
–
–
–
1
9
–
–
–
–
3,116
234
234
–
–
–
234
£m
Total
3,358
951
925
2,064
339
111
1,351
989
40,001
81,253
138
3,348
1,795
3,624
22,138
–
162,385
76,350
325
1,893
3,656
269
701
504
199
4,243
41,215
1,755
20,417
–
151,527
10,858
8,488
2,370
1,652
718
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20,960
40
21,000
–
–
–
–
–
–
–
–
–
–
–
19,289
–
19,289
1,711
1,711
–
–
–
1,711
10,858
143
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Group fInancIal statements
notes to the consolIdated
fInancIal statements
For the year ended 31 December 2012
C: Other key performance information
c1: operating profit adjusting items
(a) Summary of adjusting items
In determining the adjusted operating profit of the Group for core operations, certain adjustments are made to profit before tax to reflect the
directors’ view of the underlying long-term performance of the Group. The following table shows an analysis of those adjustments from
adjusted operating profit to profit before and after tax.
Income/(expense)
Goodwill impairment and impact of acquisition accounting
(Loss)/profit on acquisition/disposal of subsidiaries, associated undertakings and strategic investments
Short-term fluctuations in investment return
Investment return adjustment for Group equity and debt instruments held in life funds
Dividends declared to holders of perpetual preferred callable securities
US Asset Management equity plans and non-controlling interests
Credit-related fair value losses on Group debt instruments
total adjusting items
Tax on adjusting items
Non-controlling interest in adjusting items
total adjusting items after tax and non-controlling interests
Notes
C1(b)
C1(c)
C1(d)
C1(e)
C1(f)
C1(g)
C1(h)
£m
Year ended
31 december
2012
Year ended
31 December
2011
(123)
(56)
(78)
(113)
42
(5)
(126)
(459)
44
17
(398)
(401)
251
(171)
(71)
44
(4)
23
(329)
108
19
(202)
(b) Goodwill impairment and impact of acquisition accounting
Acquisition date deferred acquisition costs and deferred revenues are not recognised. These are reversed in the acquisition statement of
financial position and replaced by goodwill, other intangible assets and the value of the acquired present value of in-force business (acquired
PVIF). In determining its adjusted operating profit the Group recognises deferred revenue and acquisition costs in relation to policies sold by
acquired businesses pre-acquisition, and excludes the impairment of goodwill and the amortisation of acquired other intangibles and acquired
PVIF and the movements in certain acquisition date provisions. Goodwill impairment and acquisition accounting adjustments to adjusted
operating profit are summarised below:
Year ended 31 december 2012
Amortisation of acquired PVIF
Amortisation of acquired deferred costs and revenue
Amortisation of other acquired intangible assets
Goodwill impairment
Year ended 31 December 2011
Amortisation of acquired PVIF
Amortisation of acquired deferred costs and revenue
Amortisation of other acquired intangible assets
Goodwill impairment
emerging
markets
old mutual
wealth
usam
–
–
(2)
–
(2)
(84)
12
(48)
–
(120)
Emerging
Markets
Old Mutual
Wealth
–
–
(2)
–
(2)
(90)
13
(50)
–
(127)
–
–
(1)
–
(1)
USAM
–
–
(8)
(264)
(272)
£m
total
(84)
12
(51)
–
(123)
£m
Total
(90)
13
(60)
(264)
(401)
144
Old Mutual plcAnnual Report and Accounts 2012
(c) (Loss)/profit on acquisition/disposal of subsidiaries, associated undertakings and strategic investments
(Loss)/profit on acquisition/disposal of subsidiaries, associated undertakings and strategic investments is analysed below:
Emerging Markets
Old Mutual Wealth
long-term savings
USAM
(loss)/profit on acquisition/disposal of subsidiaries, associated undertakings and strategic investments
£m
Year ended
31 december
2012
Year ended
31 December
2011
(15)
(25)
(40)
(16)
(56)
249
–
249
2
251
On 20 November 2012, the Emerging Markets segment recognised a profit of £3 million on the acquisition of a strategic investment Curo Fund
Services (Pty) Ltd.
During the year ended 31 December 2012 the Group incurred expenses of £18 million as initial costs regarding Zimbabwean indigenisation
and Economic Empowerment Schemes. These costs are directly related to the acquisition of the Zimbabwean business. Further detail has been
provided in note A2.
On 31 August 2012, Old Mutual Wealth completed the sale of its Finnish branch at a loss of £27 million. A profit of £2 million was recognised on
the sale of Skandia Services AG (Switzerland) on 30 June 2012.
On 13 April 2012 USAM, disposed of Old Mutual Capital Inc, a subsidiary, at a profit of £12 million. On 15 May 2012, USAM disposed of
Dwight Asset Management Company LLC, a fixed income affiliate, at a profit of £7 million. On 11 October 2012, the Group announced that it
has finalised agreements to sell five USAM affiliates at a loss of £32 million. A £3 million loss has been recognised during the year ended
31 December 2012 in relation to disposals of subsidiaries by USAM in previous periods. On 30 December 2011, USAM disposed of
Lincluden Management Ltd, a subsidiary, at a profit of £2 million.
In preparing the consolidated financial statements for the year ended 31 December 2011, the Emerging Markets segment included the South
African and Namibian businesses but excluded all other African businesses. This was consistent with prior periods. Following a period of
greater political and currency stability in Zimbabwe and an expectation that the Group would be able to extract benefits from its Zimbabwean
business, it was consolidated for the first time for the year ended 31 December 2011 together with operations in Kenya, Malawi, Swaziland and
Nigeria. The Group recognised a gain of £249 million on acquisition of these businesses for the year ended 31 December 2011.
(d) Short-term fluctuations in investment return
Profit before tax, as disclosed in the IFRS income statement, includes actual investment returns earned on the shareholder assets of the Group’s
life assurance and general insurance businesses. Adjusted operating profit is stated after recalculating shareholder asset investment returns
based on a long-term investment return rate. The difference between the actual and the long-term investment returns is referred to as the
short-term fluctuation in investment return.
Long-term rates of return are based on achieved rates of return appropriate to the underlying asset base, adjusted for current inflation
expectations, default assumptions, costs of investment management and consensus economic investment forecasts. The underlying rates are
principally derived with reference to 10-year government bond rates, cash and money market rates, and an explicit equity risk premium for
South African businesses. The rates set out below reflect the weighting of investments in underlying cash, money market and equity assets.
The long-term rates of return are reviewed frequently by the Board, usually annually, for appropriateness. The review of the long-term rates of
return seeks to ensure that the returns credited to adjusted operating profit are consistent with the actual returns expected to be earned over the
long-term.
For Emerging Markets, the return is applied to an average value of investible shareholders’ assets, adjusted for net fund flows. For Old Mutual
Wealth, the return is applied to average investible assets. For M&F general insurance business, the return is an average value of investible
assets supporting shareholders’ funds and insurance liabilities, adjusted for net fund flows.
long-term investment rates
Emerging Markets
Old Mutual Wealth
Mutual & Federal
Analysis of short-term fluctuations in investment return
%
Year ended
31 december
2012
Year ended
31 December
2011
9.0
1.5-2.0
8.6
9.0
2.0-2.1
9.0
Year ended 31 december 2012
Actual shareholder investment return
Less: long-term investment return
short-term fluctuations in investment return
emerging
markets
old mutual
wealth1
long-term
savings
81
124
(43)
65
67
(2)
146
191
(45)
m&f
34
47
(13)
other
34
54
(20)
£m
total
214
292
(78)
145
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business C: Other key performance information continued
c1: operating profit adjusting items continued
Year ended 31 December 2011
Actual shareholder investment return
Less: Long-term investment return
short-term fluctuations in investment return
Emerging
Markets
Old Mutual
Wealth1
Long-Term
Savings
14
112
(98)
66
80
(14)
80
192
(112)
M&F
26
54
(28)
Other
6
37
(31)
1 Old Mutual Wealth long-term investment return includes £59 million (2011: £65 million) in respect of income tax attributable to policyholder returns.
£m
Total
112
283
(171)
(e) Investment return adjustment for Group equity and debt instruments held in policyholder funds
Adjusted operating profit includes investment returns on policyholder investments in Group equity and debt instruments held by the Group’s life
funds. These include investments in the Company’s ordinary shares, and the subordinated liabilities and ordinary securities of Nedbank. These
investment returns are eliminated within the consolidated income statement in arriving at profit before tax in the IFRS income statement, but are
included in adjusted operating profit. During the year ended 31 December 2012, the investment return adjustment increased adjusted
operating profit by £113 million (2011: increase £71 million).
(f) Dividends declared to holders of perpetual preferred callable securities
Dividends declared to the holders of the Group’s perpetual preferred callable securities were £42 million for the year ended 31 December 2012
(2011: £44 million). These are recognised in finance costs on an accruals basis for the purpose of determining adjusted operating profit. In the
IFRS financial statements this cost is recognised in equity.
(g) US Asset Management equity plans and non-controlling interests
US Asset Management has a number of long-term incentive arrangements with senior employees in its asset management affiliates.
In accordance with IFRS requirements the cost of these schemes is disclosed as being attributable to non-controlling interests. However, this is
treated as a compensation expense in determining adjusted operating profit. The loss recognised in the year ended 31 December 2012 was
£8 million (2011: loss £6 million).
The Group has issued put options in equities in the affiliates to senior employees as part of its US affiliate incentive schemes. The impact of
revaluing these instruments is recognised in accordance with IFRS, but excluded from adjusted operating profit. At 31 December 2012 these
instruments were revalued, the impact of which was a profit of £13 million (2011: profit £10 million).
(h) Credit-related fair value gains and losses on Group debt instruments
The narrowing of credit spread of the Group’s debt instruments in the market price has resulted in losses in the year ended 31 December 2012
of £54 million in Other operating segments and £1 million in Nedbank (2011: gains of £27 million and losses of £4 million respectively) being
recorded in the Group’s income statement for those instruments that are recorded at fair value.
In the directors’ view, such movements are not reflective of the underlying performance of the Group and will reverse over time. They have
therefore been excluded from adjusted operating profit.
On 1 August 2012 the Group redeemed £388 million of the £500 million senior bond due in 2016 at a cash consideration of £459 million.
The £71 million excess over the nominal value reflects the price of the respective debt instrument prior to expiration.
c2: earnings and earnings per share
(a) Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the profit for the financial period attributable to ordinary equity shareholders by the
weighted average number of ordinary shares in issue during the year excluding own shares held in policyholder funds, ESOP trusts, Black
Economic Empowerment trusts and other related undertakings.
Profit for the financial period attributable to equity holders of the parent from continuing operations
Profit for the financial period attributable to equity holders of the parent from discontinued operations
Profit for the financial period attributable to equity holders of the parent
Dividends declared to holders of perpetual preferred callable securities
profit attributable to ordinary equity holders
£m
Year ended
31 december
2012
Year ended
31 December
2011
609
564
1,173
(32)
1,141
469
198
667
(32)
635
Total dividends declared to holders of perpetual preferred callable securities of £32 million in 2012 (2011: £32 million) are stated net of tax credits
of £10 million (2011: £12 million).
146
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 weighted average number of ordinary shares in issue
Shares held in charitable foundations
Shares held in ESOP trusts
adjusted weighted average number of ordinary shares
Shares held in life funds
Shares held in Black Economic Empowerment trusts
weighted average number of ordinary shares
Basic earnings per ordinary share (pence)
Year ended
31 december
2012
millions
Year ended
31 December
2011
5,096
(6)
(61)
5,029
(181)
(261)
4,587
24.9
5,502
(6)
(61)
5,435
(201)
(299)
4,935
12.9
Diluted earnings per share recognises the dilutive impact of share options held in ESOP trusts and Black Economic Empowerment trusts
which are currently in the money in the calculation of the weighted average number of shares, as if the relevant shares were in issue for the
full period.
Profit attributable to ordinary equity holders (£m)
Dilution effect on profit relating to share options issued by subsidiaries (£m)
Diluted profit attributable to ordinary equity holders (£m)
Weighted average number of ordinary shares (millions)
Adjustments for share options held by ESOP trusts (millions)
Adjustments for shares held in Black Economic Empowerment trusts (millions)
diluted earnings per ordinary share (pence)
Year ended
31 december
2012
Year ended
31 December
2011
1,141
(10)
1,131
4,587
53
261
4,901
23.1
635
(8)
627
4,935
133
299
5,367
11.7
(b) Adjusted operating earnings per ordinary share
The reconciliation of profit/(loss) for the financial period to adjusted operating profit after tax attributable to ordinary equity holders is as follows:
profit for the financial period attributable to equity holders of the parent
Adjusting items
Tax on adjusting items
Non-core operations
Profit from discontinued operations
Non-controlling interest on adjusting items
adjusted operating profit after tax attributable to ordinary equity holders
Adjusted weighted average number of ordinary shares (millions)
adjusted operating earnings per ordinary share (pence)
£m
Year ended
31 december
2012
Year ended
31 December
2011 (restated)
1,173
459
(44)
(165)
(564)
(17)
842
4,818
17.5
667
329
(108)
184
(198)
(19)
855
4,756
18.0
147
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business C: Other key performance information continued
c2: earnings and earnings per share continued
(c) Headline earnings per share
In accordance with the JSE Limited (JSE) listing requirements, the Group is required to calculate a ‘headline earnings per share’ (HEPS), determined
by reference to the South African Institute of Chartered Accountants’ circular 3/2009 ‘Headline Earnings’. The table below sets out a reconciliation
of basic earnings per ordinary share and HEPS in accordance with that circular. Disclosure of HEPS is not a requirement of IFRS, but it is a
commonly used measure of earnings in South Africa.
profit for the financial period attributable to equity holders of the parent
Dividends declared to holders of perpetual preferred callable securities
profit attributable to ordinary equity holders
Adjustments:
Impairments of goodwill and intangible assets
(Profit)/loss on acquisition/disposal of subsidiaries, associated undertakings and
strategic investments
Realised gains (including impairments) on available-for-sale financial assets
Exchange differences realised on disposal
headline earnings
weighted average number of ordinary shares
diluted weighted average number of ordinary shares
headline earnings per share (pence)
diluted headline earnings per share (pence)
c3: dividends
2010 Final dividend paid – 2.9p per 10p share
2011 Interim dividend paid – 1.5p per 10p share
2011 Final dividend paid – 3.5p per 10p share
Special dividend – 18.0p per 10p share
2012 Interim dividend paid – 1.75p per 113⁄ 7p share
dividends to ordinary equity holders
Dividends declared to holders of perpetual preferred callable securities
dividend payments for the period
Year ended
31 december 2012
Gross
1,173
(32)
1,141
net
1,173
(32)
1,141
–
–
(183)
(21)
(350)
587
4,587
4,901
12.8
11.8
(173)
(21)
(350)
597
4,587
4,901
13.0
12.0
£m
Year ended
31 December 2011
Gross
667
(32)
635
264
(222)
(144)
–
533
4,935
5,367
10.8
9.8
Net
667
(32)
635
264
(228)
(144)
–
527
4,935
5,367
10.7
9.7
Year ended
31 december
2012
£m
Year ended
31 December
2011
–
–
178
915
79
1,172
42
1,214
145
76
–
–
221
44
265
Final and interim dividends paid to ordinary equity holders, as above, are calculated using the number of shares in issue at the record date,
less treasury shares held in ESOP trusts, life funds of Group companies, Black Economic Empowerment trusts and related undertakings.
As a consequence of the exchange control arrangements in place in certain African territories, dividends to ordinary equity holders on the
branch registers of those countries (or, in the case of Namibia, the Namibian section of the principal register) are settled through Dividend
Access Trusts established for that purpose.
Following the disposal of Nordic a special dividend of 18.0 pence per 10p share was recommended by the directors and a seven for eight
share consolidation proposed, with the consolidation approved at the Company’s general meeting on 14 March 2012. The special dividend
was paid on 7 June 2012. Further details of the disposal of the Nordic business unit have been provided in notes A2 and H1.
A final dividend of 5.25 pence (or its equivalent in other applicable currencies) per ordinary share in the Company has been recommended by
the directors. The dividend will be paid on 31 May 2013 to shareholders on the register at the close of business on 26 April 2013. The dividend
will absorb an estimated £233 million of shareholders’ funds. The Company is not planning to offer a scrip dividend alternative.
In March and November 2012, £22 million and £20 million respectively, were declared and paid to holders of perpetual preferred callable
securities (March 2011: £22 million; November 2011: £22 million).
148
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 D: Other income statement notes
d1: Income tax expense
(a) Analysis of total income tax expense
current tax
United Kingdom
Overseas tax
– Africa
– United States
– Europe
Secondary tax on companies (STC)
Prior year adjustments
total current tax
deferred tax
Origination and reversal of temporary differences
Changes in tax rates/bases
Recognition of deferred tax assets
total deferred tax
total income tax expense
(b) Reconciliation of total income tax expense
profit before tax
Tax at standard rate of 24.5% (2011: 26.5%)
Different tax rate or basis on overseas operations
Untaxed and low taxed income
Disallowable expenses
Net movement on deferred tax assets not recognised
Effect on deferred tax of changes in tax rates
STC
Income tax attributable to policyholder returns
Other
total income tax expense
(c) Income tax relating to components of other comprehensive income
Preferred perpetual callable securities
Other
Income tax credit – continuing operations
Fair value gains
Shadow accounting
Income tax expense/(credit) – discontinued operations
Income tax credit relating to components of other comprehensive income
Year ended
31 december
2012
£m
Year ended
31 December
2011
18
513
4
30
23
5
593
(121)
2
(2)
(121)
472
22
390
(2)
20
14
(7)
437
(204)
(8)
–
(212)
225
Year ended
31 december
2012
1,395
342
19
(58)
48
48
2
20
59
(8)
472
£m
Year ended
31 December
2011
994
263
57
(166)
93
5
(8)
19
(28)
(10)
225
Year ended
31 december
2012
£m
Year ended
31 December
2011
(10)
5
(5)
1
–
1
(4)
(12)
–
(12)
2
(4)
(2)
(14)
149
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business D: Other income statement notes continued
d1: Income tax expense continued
(d) Reconciliation of income tax expense in the IFRS income statement to income tax on adjusted operating profit
Income tax expense
Goodwill impairment and impact of acquisition accounting
Profit on disposal of subsidiaries, associates and strategic investments
Short-term fluctuations in investment return
Income tax attributable to policyholders returns
Tax on dividends declared to holders of perpetual preferred callable securities recognised in equity
Fair value gains and losses on Group debt instruments
US Asset Management equity plans
Tax on non-core operations
Income tax on adjusted operating profit
d2: Investment return (non-banking)
Interest and similar income
Loans and advances
Investments and securities
Cash and cash equivalents
total interest and similar income
Dividend income – investments and securities
Fair value gains and losses recognised in income
Rental income from investment property
Investment property gains/(losses) on revaluation
Foreign currency losses
total investment return recognised in income
Year ended
31 december
2012
£m
Year ended
31 December
2011
472
51
(10)
7
(75)
(10)
–
6
–
441
225
35
6
75
9
(12)
2
2
(1)
341
Year ended
31 december
2012
£m
Year ended
31 December
2011
35
967
82
1,084
500
7,697
176
75
(8)
9,524
8
1,151
94
1,253
431
(2,352)
180
(78)
(1)
(567)
Total interest income for assets not at fair value through income statement
35
36
The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows:
Held-for-trading (including derivatives)
Designated at fair value through income statement
Available-for-sale financial assets
(107)
7,785
19
7,697
25
(2,378)
1
(2,352)
Fair value gains and losses on available-for-sale financial assets for the year of £19 million (2011: £1 million) relate to gains realised on the sale
of debt securities held by the Group’s Old Mutual Bermuda business.
150
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 d3: Banking interest and similar income
loans and advances
Mortgage loans
Finance lease and instalment debtors
Credit cards
Bills and acceptances
Overdrafts
Term loans and other
Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
total interest and similar income
Total interest income for assets not at fair value through income statement
Total interest income on impaired financial assets
d4: Banking trading, investment and similar income
Dividend income – investments and securities
Rental income from investment property
Exchange and other non-interest income
Net trading income
total banking trading, investment and similar income
The fair value gains and losses shown above are analysed according to their IAS 39 categorisations as follows:
Held-for-trading (including derivatives)
Designated at fair value through income statement
Realised fair value loss included in the above
d5: fee and commission income, and income from service activities
Year ended 31 december 2012
Fee and commission income
Transaction and performance fees
Change in deferred revenue
Year ended 31 December 2011
Fee and commission income
Transaction and performance fees
Change in deferred revenue
long-term
business
asset
management
Banking
General
insurance
920
–
12
932
1,108
42
10
1,160
Long-term
business
Asset
management
1,003
–
(45)
958
1,048
20
(1)
1,067
977
–
1
978
Banking
975
–
1
976
27
–
(1)
26
General
insurance
34
–
–
34
The amounts shown above for asset management relate to fees earned on trust and fiduciary activities where the Group holds or invests assets
on behalf of its customers.
151
Year ended
31 december
2012
£m
Year ended
31 December
2011
3,041
1,392
560
101
–
99
889
390
258
132
3,300
1,577
608
100
1
105
909
369
264
105
3,431
3,669
2,948
86
3,154
121
Year ended
31 december
2012
£m
Year ended
31 December
2011
8
9
(1)
198
214
(87)
68
(19)
(19)
37
4
(10)
186
217
(41)
40
(1)
(1)
£m
total
3,032
42
22
3,096
£m
Total
3,060
20
(45)
3,035
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business D: Other income statement notes continued
d6: finance costs
Interest payable on borrowed funds
Senior debt and term loans
Subordinated debt
Other
fair value gains and losses on borrowed funds
Borrowed funds
Derivative instruments
Foreign currency gains and losses on borrowed funds
total finance costs excluding banking activities
Year ended
31 december
2012
Note
£m
Year ended
31 December
2011
156
99
61
(4)
57
77
(20)
1
214
193
21
(9)
66
57
87
37
65
(15)
(32)
11
(43)
3
58
209
23
(43)
11
(32)
Year ended
31 december
2012
£m
Year ended
31 December
2011
Finance costs from banking activities
D7
Total interest expense included above for liabilities not at fair value through income statement
The fair value gains and losses shown above are analysed according to their IAS 39 categorisations
as follows:
Held-for-trading (including derivatives)
Designated at fair value through income statement
d7: Banking interest payable and similar expense
amounts owed to bank depositors
Deposits and loan accounts
Current and savings accounts
Negotiable certificates of deposit
Banking non-interest credit spreads
Long-term debt instruments
other liabilities
total interest payable and similar expenses
Total interest expense included above for liabilities not at fair value through income statement
d8: fee and commission expenses, and other acquisition costs
Year ended 31 december 2012
Fee and commission expenses
Change in deferred acquisition costs
Other acquisition costs
Year ended 31 December 2011
Fee and commission expenses
Change in deferred acquisition costs
Other acquisition costs
152
1,739
1,082
11
451
2
193
148
1,887
1,147
long-term
business
asset
management
General
insurance
566
51
60
677
242
5
–
247
110
(3)
–
107
Long-term
business
Asset
management
General
insurance
591
8
60
659
243
(4)
–
239
110
(1)
–
109
1,953
1,106
20
614
4
209
142
2,095
1,686
£m
total
918
53
60
1,031
£m
Total
944
3
60
1,007
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 d9: other operating and administrative expenses
(a) Other operating and administrative expenses include:
Staff costs
Depreciation
Software costs
Operating lease rentals – banking
Operating lease rentals – non-banking
Amortisation of PVIF and other acquired intangibles
Note
D9(b)
F2
Year ended
31 december
2012
£m
Year ended
31 December
2011
1,919
101
9
66
32
188
1,964
104
11
65
29
211
Included within the gain from discontinued operations is an additional amortisation of intangibles charge of £15 million (2011: £74 million).
(b) Staff costs
Wages and salaries
Social security costs
Retirement obligations
Defined contribution plans
Defined benefit plans
Other retirement benefits
Bonus and incentive remuneration
Share-based payments
Cash settled
Equity settled
Other
the average number of persons employed by the Group was:
Long-Term Savings
Nedbank
M&F
USAM
Other
Non-core operations (Old Mutual Bermuda)
Discontinued operations
Year ended
31 december
2012
Note
1,215
31
97
(4)
12
351
64
14
139
G2(f)
G2(f)
£m
Year ended
31 December
2011
1,259
33
101
(3)
10
359
37
24
144
1,919
1,964
Year ended
31 december
2012
number
Year ended
31 December
2011
21,789
28,767
2,371
1,225
179
37
54,368
–
54,368
22,851
28,494
2,390
1,564
210
40
55,549
1,881
57,430
153
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business D: Other income statement notes continued
d9: other operating and administrative expenses continued
(c) Fees to Group’s auditors
Included in other operating expenses and loss from discontinued operations are fees paid to the Group’s auditors. These can be categorised
as follows:
fees for audit services
Group
Subsidiaries
Pension schemes
Total audit fees
fees for non-audit services
Audit-related assurance
Taxation compliance
Taxation advisory
Corporate finance transactions
Other non-audit services
Total non-audit services
Year ended
31 december
2012
£m
Year ended
31 December
2011
1.2
11.0
0.2
12.4
2.4
1.5
0.1
0.6
0.5
5.1
1.4
12.1
0.2
13.7
0.7
1.4
0.4
0.2
0.7
3.4
total Group auditors’ remuneration
17.5
17.1
In addition to the above, fees of £4.2 million (2011: £4.4 million) were payable to other auditors in respect of joint audit arrangements of Nedbank,
the Group’s banking subsidiary in South Africa.
(d) Operating lease payments
Banking
Non-banking
Year ended
31 december
2012
£m
Year ended
31 December
2011
66
10
76
65
12
77
Operating lease payments principally represent rentals payable by the Group for the rental of buildings and equipment.
154
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 E: Financial assets and liabilities
e1: Group statement of financial position
The Group is exposed to financial risk through its financial assets (investments and loans), financial liabilities (investment contracts, customer
deposits and borrowings), reinsurance assets and insurance liabilities. The key focus of financial risk management for the Group is ensuring
that the proceeds from its financial assets are sufficient to fund the obligations arising from its insurance and banking operations. The most
important components of financial risk are credit risk, market risk (arising from changes in equity, and bond prices, interest and foreign
exchange rates), and liquidity risk.
(a) Recognition and de-recognition
A financial asset or liability is recognised when, and only when, the Group becomes a party to the contractual provisions of the financial
instrument.
The Group de-recognises a financial asset when, and only when:
■ The contractual rights to the cash flows arising from the financial assets have expired or been forfeited by the Group; or
■ It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or
■ It no longer controls the financial asset nor retains substantially all the risks and rewards of ownership, regardless of whether it has
transferred the asset.
A financial liability is de-recognised when and only when the liability is extinguished, that is when the obligation specified in the contract is
discharged, assigned, cancelled or has expired.
The difference between the carrying amount of a financial liability (or part thereof) extinguished or transferred to another party and
consideration received, including any non-cash assets transferred or liabilities assumed, is recognised in the income statement.
All purchases and sales of financial assets that require delivery within the timeframe established by regulation or market convention (‘regular
way’ purchases and sales) are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. Otherwise such
transactions are treated as derivatives until settlement occurs. Loans and receivables are recognised (at fair value plus attributable transaction
costs) when cash is advanced to borrowers.
(b) Initial measurement
Financial instruments are initially recognised at fair value plus, in the case of a financial asset or financial liability not at fair value through the
income statement, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.
(c) Derivative financial instruments
Derivative financial instruments are recognised in the statement of financial position at fair value. Fair values are obtained from quoted market
prices, discounted cash flow models and option pricing models as appropriate. All derivatives are carried as assets when their fair value is
positive and as liabilities when their fair value is negative.
Changes in the fair value of derivatives not designated as hedges for hedge accounting purposes are included in investment income or finance
costs as appropriate.
(d) Hedge accounting
Qualifying hedging instruments must either be derivative financial instruments or non-derivative financial instruments used to hedge the risk of
changes in foreign currency exchange rates, changes in fair value or changes in cash flows. Changes in the value of the financial instrument
should be expected to offset changes in the fair value or cash flows of the underlying hedged item.
The Group designates certain qualifying hedging instruments as either (1) a hedge of the exposure to changes in fair value of a recognised
asset or liability or an unrecognised firm commitment (fair value hedge); (2) a hedge of a future cash flow attributable to a recognised asset or
liability, or a forecasted transaction, and could affect profit or loss (cash flow hedge); or, (3) a hedge of a net investment in a foreign operation.
Hedge accounting is used for qualifying hedging instruments designated in this way provided certain criteria are met.
The Group’s criteria in accordance with reporting standards for a qualifying hedging instrument to be accounted for as a hedge include:
■ Upfront formal documentation of the hedging instrument, hedged item or transaction, risk management objective and strategy, the nature of
the risk being hedged and the effectiveness measurement methodology that will be applied is prepared before hedge accounting is adopted
■ The hedge is documented showing that it is expected to be highly effective in offsetting the changes in the fair value or cash flows
attributable to the hedged risk, consistent with the risk management and strategy detailed in the upfront hedge documentation
■ The effectiveness of the hedge can be reliably measured
■ The hedge is assessed and determined to have been highly effective on an ongoing basis
■ For cash flow hedges of a forecast transaction, an assessment that it is highly probable that the hedged transaction will occur and will carry
profit and loss risk.
155
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
(d) Hedge accounting continued
Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that prove to be highly effective in relation
to hedged risk, are recorded in the income statement, along with the corresponding change in fair value of the hedged asset or liability that is
attributable to that specific hedged risk.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges or hedges of a net investment in a foreign
operation, and that prove to be highly effective in relation to the hedged risk, are recognised in other comprehensive income.
If the hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued prospectively. Any previous adjustment to
the carrying amount of a hedged interest-bearing financial instrument carried at amortised cost (as a result of previous hedge accounting),
is amortised in the income statement from the date hedge accounting ceases, to the maturity date of the financial instrument, based on the
effective interest method.
For hedges of a net investment in a foreign operation, any cumulative gains or losses in equity are recognised in the income statement on
disposal of the foreign operation.
(e) Embedded derivatives
Certain derivatives embedded in financial and non-financial instruments, such as the conversion option in a convertible bond, are treated
as separate derivatives and recognised as such on a stand alone basis, when their risks and characteristics are not closely related to those of
the host contract and the host contract is not carried at fair value with unrealised gains and losses reported in the income statement. If it is not
possible to determine the fair value of the embedded derivative, the entire hybrid instrument is categorised as fair value through the income
statement and measured at fair value.
(f) Offsetting financial instruments and related income
Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally
enforceable right to set off and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Income and expense items are offset only to the extent that their related instruments have been offset in the statement of financial position,
with the exception of those relating to hedges, which are disclosed in accordance with the income statement effect of the hedged item.
(g) Interest income and expense
Interest income and expense in relation to financial instruments carried at amortised cost or held as available-for-sale are recognised in the
income statement using the effective interest method, taking into account the expected timing and amount of cash flows. Interest income and
expense include the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing
instrument and its amount at maturity calculated on an effective interest basis.
Interest income and expense on financial instruments carried at fair value through the income statement are presented as part of interest
income or expense.
(h) Non-interest revenue
Non-interest revenue in respect of financial instruments principally comprises fees and commission and other operating income. These are
accounted for as set out below.
Fees and commission income
Loan origination fees, for loans that are probable of being drawn down, are deferred (together with related direct costs) and recognised as an
adjustment to the effective yield on the loan. Fees and commission arising from negotiating, or participating in the negotiation of a transaction
for a third-party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, are recognised on completion
of the underlying transaction.
Other
Revenue other than interest, fees and commission (including fees and insurance premiums), which includes exchange and securities trading
income, dividends from investments and net gains on the sale of banking assets, is recognised in the income statement when the amount of
revenue from the transaction or service can be measured reliably and it is probable that the economic benefits of the transaction or service will
flow to the Group.
(i) Financial assets
Non-derivative financial assets are recorded as held-for-trading, designated as fair value through the income statement, loans and receivables,
held-to-maturity or available-for-sale. An analysis of the Group’s statement of financial position, showing the categorisation of financial assets,
together with financial liabilities is set out in note E1(m).
(j) Classification of financial instruments
Held-for-trading financial assets
Held-for-trading financial assets are those that were either acquired for generating a profit from short-term fluctuations in price or dealer’s
margin, or are securities included in a portfolio in which a pattern of short-term profit taking exists, or are derivatives that are not designated as
effective hedging instruments.
156
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Financial assets designated as fair value through the income statement
Financial assets that the Group has elected to designate as fair value through the income statement are those where the treatment either
eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement
basis (for instance with respect to financial assets supporting insurance contract provisions) or are managed, evaluated and reported using a
fair value basis (for instance financial assets supporting shareholders’ funds).
All financial assets carried at fair value through the income statement, whether held-for-trading or designated, are initially recognised at fair
value and subsequently remeasured at fair value based on quoted bid prices. If such price information is not available for these instruments, the
Group uses other valuation techniques, including internal models, to measure these instruments. These techniques use market observable inputs
where available, derived from similar assets and liabilities in similar and active markets, from recent transaction prices for comparable items or
from other observable market data. For positions where observable reference data are not available for some or all parameters, the Group
estimates the non-market observable inputs used in its valuation models. Where discounted cash flow techniques are used, estimated future
cash flows are based on management’s best estimates and the discount rate used is a market-related rate at the reporting date for an
instrument with similar terms and conditions.
Fair values of certain financial instruments, such as over-the-counter (OTC) derivative instruments, are determined using pricing models that
consider, among other factors, contractual and market prices, correlations, yield curves, credit spreads, and volatility factors.
Realised and unrealised fair value gains and losses on all financial assets carried at fair value through the income statement are included in
Investment return (non-banking) or in Banking trading, investment and similar income as appropriate.
Interest earned whilst holding financial assets at fair value through the income statement is reported within Investment return (non-banking) or
Banking interest and similar income, as appropriate. Dividends receivable are included separately in dividend income, within Investment return
(non-banking) or Banking trading, investment and similar income, when a dividend is declared.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market,
other than those classified by the Group as fair value through income statement or available-for-sale. Loans and receivables are carried at
amortised cost less any impairment write-downs. Third-party expenses such as legal fees incurred in securing a loan are treated as part of the
cost of the transaction.
Held-to-maturity financial assets
Financial assets with fixed maturity dates which are quoted in an active market and where management has both the intent and the ability to hold
the asset to maturity are classified as held-to-maturity. These assets are carried at amortised cost less any impairment write-downs. Interest earned
on held-to-maturity financial assets is reported within Investment return (non-banking) or Banking interest and similar income, as appropriate.
Available-for-sale financial assets
Financial assets intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest
rates, exchange rates or equity prices other than those designated fair value through income statement or as loans and receivables, are
classified as available-for-sale. Management determines the appropriate classification of its investments at the time of the purchase.
Available-for-sale financial assets are measured at fair value based on quoted bid prices. If quoted bid prices are unavailable or determined
to be unreliable, the fair value of the financial asset is estimated using pricing models or discounted cash flow techniques. Where discounted
cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate used is a
market-related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based
on observable market data where available at the reporting date.
Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in other comprehensive
income. When available-for-sale financial assets are disposed the related accumulated fair value adjustments are included in the income
statement as gains and losses from available-for-sale financial assets. When available-for-sale assets are impaired the resulting loss is shown
separately in the income statement as an impairment charge.
Interest earned on available-for-sale financial assets is reported within Investment return (non-banking) or Banking interest and similar income,
as appropriate. Dividends receivable are included separately in dividend income, within Investment return (non-banking) or Banking trading,
investment and similar income, as appropriate when a dividend is declared.
Financial liabilities (other than investment contracts and derivatives)
Non-derivative financial liabilities, including borrowed funds, amounts owed to depositors and liabilities under acceptances, are recorded as
held-for-trading, designated as fair value through the income statement or as financial liabilities at amortised cost.
Liabilities that the Group has elected to designate as fair value through the income statement are those where the treatment either eliminates or
significantly reduces a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis and are
managed, evaluated and reported using a fair value basis.
For financial liabilities recorded at fair value and which contain a demand feature, the fair value of the liability is not less than the amount
payable on demand, discounted from the first date that the amount could be required to be paid.
Financial liabilities categorised at amortised cost are recognised initially at fair value, which is normally represented by the transaction price, less
directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are stated at amortised cost with any difference
between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
157
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
Financial liabilities (other than investment contracts and derivatives) continued
Conversion options included within financial liabilities are recorded separately in shareholders’ equity. The Group does not recognise any
change in the value of this option in subsequent periods. The remaining obligation to make future payments of principal and interest to
bondholders is calculated using a market interest rate for an equivalent non-convertible bond and is presented on the amortised cost basis
in other borrowed funds until extinguished on conversion or maturity of the bonds.
If the Group purchases its own debt, it is removed from the statement of financial position and the difference between the carrying amount
of a liability and the consideration paid is included in other income.
(k) Reclassifications of financial assets
A non-derivative financial asset that would have met the definition of loans and receivables at initial recognition that was required to be
categorised as held-for-trading (on the basis that it was held for the purpose of selling or repurchasing in the near term) may under exceptional
circumstances be reclassified out of the fair value through income statement category if the Group intends and is able to hold the financial asset
for the foreseeable future or until maturity. If a financial asset is so reclassified, it is reclassified at its fair value on the date of reclassification.
Any gain or loss already recognised in profit or loss is not reversed. The fair value at the date of reclassification becomes its new cost or
amortised cost, as applicable.
Other non-derivative financial assets that were required to be categorised as held-for-trading at initial recognition may be reclassified out of
the fair value through income statement category in rare circumstances. If a financial asset is so reclassified, it is reclassified at its fair value on
the date of reclassification. Any gain or loss already recognised in profit or loss is not reversed. Measurement of the asset after reclassification
depends on the subsequent categorisation.
A non-derivative financial asset that would have met the definition of loans and receivables at initial recognition that was designated as
available-for-sale may under exceptional circumstances be reclassified out of the available-for-sale category to the loans and receivables
category if it meets the loans and receivables definition at the date of reclassification and if the Group intends and is able to hold the financial
asset for the foreseeable future or until maturity. If a financial asset is so reclassified, it is reclassified at its fair value on the date of reclassification.
The fair value at the date of reclassification becomes its new cost or amortised cost, as applicable. In the case of a financial asset with a fixed
maturity, the gain or loss already recognised in the available-for-sale reserve in equity is amortised to profit or loss over the remaining life using
the effective interest method together with any difference between the new amortised cost and the maturity amount. In the case of a financial
asset that does not have a fixed maturity, the gain or loss already recognised in the available-for-sale reserve in equity is recognised in profit
or loss when the financial asset is sold or otherwise disposed.
(l) Sale and repurchase agreements and lending of securities
Securities sold subject to linked repurchase agreements are retained in the financial statements as appropriate when considering the
de-recognition criteria contained within IAS 39. The securities that are retained in the financial statements are reflected as trading or investment
securities and the counterparty liability is included in amounts owed to other depositors, deposits from other banks, or other money market
deposits, as appropriate. Securities purchased under agreements to resell at a pre-determined price are recorded as loans and advances to
other banks or customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued over the
lives of agreements using the effective interest method.
Securities lent to counterparties are retained in the financial statements and any interest earned recognised in the income statement using the
effective interest method.
Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale
are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability.
(m) Categories of financial instruments
The analysis of assets and liabilities into their categories as defined in IAS 39 ‘Financial Instruments: Recognition and Measurement’ is set out
in the following table. For completeness, assets and liabilities of a non-financial nature, or financial assets and liabilities that are specifically
excluded from the scope of IAS 39, are reflected in the non-financial assets and liabilities category.
158
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 at 31 december 2012
assets
Mandatory reserve deposits
with central banks
Reinsurers’ share of
policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and
other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total financial assets
Total non-financial assets
total assets
liabilities
Life assurance policyholder liabilities
Third-party interest in consolidation
of funds
Borrowed funds
Trade, other payables and
other liabilities
Amounts owed to bank depositors
Derivative financial instruments –
liabilities
Total financial liabilities
Total non-financial liabilities
total liabilities
At 31 December 2011
assets
Mandatory reserve deposits
with central banks
Reinsurers’ share of
policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and
other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total financial assets
Total non-financial assets
total assets
liabilities
Life assurance policyholder liabilities
Third-party interest in consolidation
of funds
Borrowed funds
Trade, other payables and
other liabilities
Amounts owed to bank depositors
Derivative financial instruments –
liabilities
Total financial liabilities
Total non-financial liabilities
total liabilities
fair value through
income statement
total
held-for-
trading
designated
available-
for-sale
financial
assets
held-to-
maturity
investments
loans and
receivables
financial
liabilities
amortised
cost
non-
financial
assets and
liabilities
£m
921
–
–
1,406
38,495
86,381
2,890
1,781
3,863
135,737
7,760
143,497
80,188
2,783
3,050
4,789
39,499
1,402
131,711
1,988
133,699
–
2,158
1,245
275
1,781
–
5,459
–
5,459
–
–
–
463
4,060
1,402
5,925
–
5,925
1,164
4,068
81,999
582
–
–
87,813
–
87,813
59,092
2,783
919
373
5,728
–
68,895
–
68,895
–
–
3
899
–
–
–
902
–
902
–
–
–
–
–
–
–
–
–
–
921
–
–
1,809
–
–
–
1,809
–
1,809
21
32,266
429
1,661
–
3,863
39,161
–
39,161
–
–
–
–
–
–
–
–
–
–
–
221
–
–
372
–
–
593
7,760
8,353
201
–
20,895
–
–
–
–
–
–
–
–
–
–
–
–
–
–
201
–
201
–
2,131
3,073
29,711
–
34,915
–
34,915
Financial
liabilities
amortised
cost
–
–
880
–
–
21,775
1,988
23,763
£m
Non-
financial
assets and
liabilities
Fair value through
income statement
Total
Held-for-
trading
Designated
Available-
for-sale
financial
assets
Held-to-
maturity
investments
Loans and
receivables
951
–
–
989
40,001
81,253
3,348
1,795
3,624
131,961
30,424
162,385
76,350
1,893
3,656
4,243
41,215
1,755
129,112
22,415
151,527
–
1,586
1,155
530
1,795
–
5,066
–
5,066
–
–
–
547
3,068
1,755
5,370
–
5,370
784
3,970
77,789
828
–
–
83,371
–
83,371
55,333
1,893
1,071
349
6,870
–
65,516
–
65,516
–
–
–
988
–
–
–
988
–
988
–
–
–
–
–
–
–
–
–
–
951
–
–
677
–
–
–
677
–
677
21
34,445
644
1,591
–
3,624
41,276
–
41,276
28
176
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
28
–
28
–
–
–
237
–
413
–
413
–
2,585
2,434
31,040
–
36,059
–
36,059
–
184
–
–
399
–
–
583
30,424
31,007
20,813
–
–
913
–
–
21,726
22,415
44,141
159
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
(n) Parent Company investments in subsidiary undertakings and associates
Parent Company investments in subsidiary undertakings and associates are recorded at cost. Impairments of Parent Company investments in
subsidiary undertakings and associates are accounted for in the same way as impairments of other non-financial assets.
(o) Impairments of financial assets
Indicators of impairment
A provision for impairment is established if there is objective evidence that the Group will not be able to recover all amounts relating to the
financial asset. Observable data that could come to the attention of the Group that could lead to a provision for impairment to be made include:
■ Significant financial difficulty of the counterparty
■ A breach of contract, such as a default or delinquency in interest or principal payments
■ The Group, for economic or legal reasons relating to the counterparty’s financial difficulty, grants to the counterparty a concession that the
Group would not otherwise consider
■ It becoming probable that the counterparty will enter bankruptcy or other financial reorganisation
■ Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of assets since the initial
recognition of those assets, although the decrease cannot yet be identified with the individual financial assets, including:
— adverse changes in the payment status of counterparties in the group of financial assets; or
— national or local economic conditions that correlate with defaults on the assets in the group of financial assets.
In addition, for an available-for-sale financial asset, a significant or prolonged decline in the fair value below its cost is also objective evidence
of impairment.
Financial assets at amortised cost
The amount of the impairment of a financial asset held at amortised cost is the difference between the carrying amount and the recoverable
amount, being the value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the
effective interest rate at initial recognition. In estimating expected cash flows the Group looks at the contractual cash flows of the assets and
adjusts these contractual cash flows for historical loss experience of assets with similar credit risks, with this adjusted to reflect any additional
conditions that are expected to arise or to account for those which no longer exist.
The impairment provision also covers losses where there is objective evidence that losses are present in components of the loan portfolio at the
reporting date, but these components have not yet been specifically identified. When a loan is uncollectable, it is written-off against the related
impairment provision.
If the amount of impairment subsequently decreases due to an event occurring after the write-down, the release of the impairment provision is
credited to the income statement. Impairment reversals are limited to what the carrying amount would have been, had no impairment losses
been recognised.
Interest income on impaired loans and receivables is recognised on the impaired amount using the original effective interest rate before
the impairment.
Available-for-sale financial assets
The amount of the impairment loss of an available-for-sale financial asset is the cumulative loss that has been recognised in other
comprehensive income, being the difference between the acquisition cost and the asset’s current fair value, less any impairment loss on that
asset previously recognised in the income statement. For available-for-sale debt securities, fair value is determined as is the present value of
expected future cash flows discounted at the current market rate of interest.
All such impairments are recognised in the income statement. The release of an impairment allowance in respect of a debt instrument
categorised as available-for-sale is credited to the income statement; the release in respect of an equity instrument categorised as available-
for-sale is credited to the available-for-sale reserve within equity.
(p) Fair values of financial assets and liabilities
Determination of fair value
All financial instruments, regardless of their IAS 39 categorisation, are initially recorded at fair value. The fair value of a financial instrument
on initial recognition is normally the transaction price, that is, the fair value of the consideration given or received. In certain circumstances,
however, the initial fair value may be based on other observable current market transactions in the same instrument, without modification
or repackaging, or on a valuation technique whose variables include only observable data.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in active markets are based
on bid prices for assets, which in certain circumstances includes using quotations from independent third parties such as brokers and pricing
services, and offer prices for liabilities. When quoted prices are not available, fair values are determined by using valuation techniques that
refer as far as possible to observable market data. These include comparison with similar instruments where market observable prices exist,
discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. A number of
160
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 factors such as bid-offer spread, credit profile, servicing costs and model uncertainty are taken into account, as appropriate, when values are
calculated using a valuation technique. Changes in the assumptions used in such valuations could impact the reported value of such instruments.
In general none of the carrying amounts of financial assets and liabilities carried at amortised cost have a fair value significantly different to
their carrying amounts. Such assets and liabilities primarily comprise variable-rate financial assets and liabilities that re-price as interest rates
change, short-term deposits or current assets.
Loans and advances
Loans and advances principally comprise variable rate financial assets and liabilities, which are repriced when there are movements in the
interest rates.
The Group has developed and applied a fair value methodology in respect of gross exposures of loans and advances that are measured at
amortised cost. The methodology incorporates the historical interest rates per product type and the projected monthly cash flows per product
type. Future forecasts for the overall probability of default (PD) and Loss Given Defaults (LGDs) for periods 2013 to 2015 (2011: for periods 2012
to 2014), based on the latest internal data available, is applied to the first three years’ projected cash flows. Average PDs and LGDs are applied
to the projected cash flows for later years. These results are compared to both regulatory and accounting credit model values. There are no
significant variances in the fair value methodology results compared to the carrying values reported in these financial statements.
For impaired advances, the carrying value as determined from the Group’s credit models is considered the best estimate of fair value. The
Group is satisfied that, after considering the internal credit models together with other assumptions and the variable interest rate exposure,
the carrying value of loans and advances measured at amortised cost approximates fair value.
Investments and securities
Investments and securities include government and government-guaranteed securities, listed and unlisted debt securities, preference shares
and debentures, listed and unlisted equity securities, listed and unlisted pooled investments (see below), short-term funds and securities treated
as investments and certain other securities.
Pooled investments represent the Group’s holdings of shares/units in open-ended investment companies, unit trusts, mutual funds and similar
investment vehicles. Pooled investments are stated at fair value. The fair values of pooled investments are based on widely published prices that
are regularly updated or models based on the market prices of investments held in the underlying pooled investment funds.
Investment contracts
The approach to determining the fair values of investment contracts is set out in the accounting policies section for insurance and investment
contract business.
Amounts owed to bank depositors
The fair values of amounts owed to bank depositors corresponds with the carrying amount shown in the statement of financial position, which
generally reflects the amount payable on demand.
Borrowed funds
The fair values of amounts included in borrowed funds are based on quoted market prices at the reporting date where applicable, or by
reference to quoted prices of similar instruments.
Other financial assets and liabilities
The fair values of other financial assets and liabilities (which comprise cash and cash equivalents, cash with central banks, other assets and
liabilities) are reasonably approximated by the carrying amounts reflected in the statement of financial position as they are short-term in nature
or re-price to current market rates frequently.
Fair value hierarchy
Fair values are determined according to the following hierarchy.
■ Level 1 – quoted market prices: financial assets and liabilities with quoted prices for identical instruments in active markets. Instruments
classified as Level 1 generally comprise listed equity securities, government securities and other listed debt securities and similar instruments,
actively traded pooled investments, certain quoted derivative assets and liabilities, listed borrowed funds and investment contract liabilities
linked to Level 1 pooled investments and other assets
■ Level 2 – valuation techniques using observable inputs: financial assets and liabilities with quoted prices for similar instruments in active
markets or quoted prices for identical or similar instruments in inactive markets and financial assets and liabilities valued using models where
all significant inputs are observable. Instruments classified as Level 2 generally comprise unlisted equity and debt securities where the
valuation is based on models involving no significant unobservable data. This includes certain loans and advances, certain privately placed
debt instruments, third-party interests in consolidated funds and amounts owed to bank depositors
■ Level 3 – valuation techniques using significant unobservable inputs: financial assets and liabilities valued using valuation techniques where
one or more significant inputs are unobservable. Instruments classified as Level 3 generally comprise unlisted equity and securities with
significant unobservable inputs, securities where the market is not considered sufficiently active, including certain inactive pooled investments,
and derivatives embedded in certain portfolios of insurance contracts where the derivative is not closely related to the host contract and the
valuation contains significant unobservable inputs.
161
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
Fair value hierarchy continued
The table below analyses the financial assets and liabilities according to fair value hierarchy:
at 31 december 2012
financial assets measured at fair value
Held-for-trading (fair value through income statement)
Loans and advances
Investments and securities
Other financial assets
Derivative financial instruments – assets
Designated (fair value through income statement)
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Other financial assets
Available-for-sale financial assets
Loans and advances
Investments and securities
total assets measured at fair value
financial liabilities measured at fair value
Held-for-trading (fair value through income statement)
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through income statement)
Life assurance policyholder liabilities
Third-party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
total
level 1
level 2
5,459
2,158
1,245
275
1,781
87,813
1,164
4,068
81,999
582
902
3
899
639
–
361
275
3
68,059
1,164
2
66,338
555
335
3
332
4,816
2,158
880
–
1,778
18,694
–
4,057
14,610
27
565
–
565
£m
level 3
4
–
4
–
–
1,060
–
9
1,051
–
2
–
2
94,174
69,033
24,075
1,066
5,925
463
4,060
1,402
68,895
59,092
2,783
919
373
5,728
462
459
–
3
42,788
41,879
–
906
3
–
5,463
4
4,060
1,399
25,627
16,733
2,783
13
370
5,728
–
–
–
–
480
480
–
–
–
–
total liabilities measured at fair value
74,820
43,250
31,090
480
162
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 At 31 December 2011
financial assets measured at fair value
Held-for-trading (fair value through income statement)
Loans and advances
Investments and securities
Other financial assets
Derivative financial instruments – assets
Designated (fair value through income statement)
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Other financial assets
Available-for-sale financial assets
Investments and securities
total assets measured at fair value
financial liabilities measured at fair value
Held-for-trading (fair value through income statement)
Other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Designated (fair value through income statement)
Life assurance policyholder liabilities
Third-party interests in consolidated funds
Borrowed funds
Other liabilities
Amounts owed to bank depositors
Total
Level 1
Level 2
5,066
1,586
1,155
530
1,795
83,371
784
3,970
77,789
828
988
988
764
–
234
530
–
62,368
782
2
60,808
776
459
459
4,294
1,586
915
–
1,793
20,002
2
3,961
15,987
52
525
525
£m
Level 3
8
–
6
–
2
1,001
–
7
994
–
4
4
89,425
63,591
24,821
1,013
5,370
547
3,068
1,755
65,516
55,333
1,893
1,071
349
6,870
555
542
–
13
33,213
32,156
–
1,057
–
–
4,814
5
3,068
1,741
31,282
22,156
1,893
14
349
6,870
1
–
–
1
1,021
1,021
–
–
–
–
total liabilities measured at fair value
70,886
33,768
36,096
1,022
The best evidence of fair value is a quoted price in an active market. In the event that the market for a financial asset or liability is not active,
or quoted prices cannot be obtained without undue effort, a valuation technique is used.
The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of
trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price
provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset
or liability requires additional work during the valuation process.
The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However,
certain financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant market inputs that are
unobservable and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using
significant unobservable inputs if a significant proportion of that asset or liability’s carrying amount is driven by unobservable inputs. In this
context, ‘unobservable’ means that there is little or no current market data available for which to determine the price at which an arm’s length
transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination
of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable inputs
may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will generally be restricted
to uncertainty about the overall fair value of the asset or liability being measured.
The transfers into Level 3 largely relate to instances where inputs on certain financial assets and liabilities obtained from pricing service providers
are no longer observable. The transfers out of Level 3 relate to certain pooled investments no longer being considered inactive and for which
observable inputs are now available. There were no significant transfers between Level 1 and Level 2 during the year.
Additional information on the impact of unobservable inputs is provided in the section headed ‘Effect of changes in significant unobservable
assumptions to reasonably possible alternatives’.
163
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
Fair value hierarchy continued
The table below shows the movement in Level 3 assets measured at fair value:
held-for-
trading –
loans and
advances
held-for-
trading –
Investments
and securities
held-for-
trading –
derivatives
designated
fair value
through
income
statement –
loans and
advances
designated
fair value
through
income
statement –
Investments
and securities
available-
for-sale –
Investments
and securities
–
–
–
–
–
–
–
–
–
–
6
(1)
–
–
–
–
(1)
4
–
–
2
–
–
(2)
–
–
–
–
–
–
7
2
–
–
–
–
–
9
–
–
994
46
108
(54)
54
(21)
(76)
1,051
(25)
–
4
–
–
(2)
–
–
–
2
–
–
Held-for-
trading –
Loans and
advances
Held-for-
trading –
Investments
and securities
Held-for-
trading –
Derivatives
Designated
fair value
through
income
statement –
Loans and
advances
Designated
fair value
through
income
statement –
Investments
and securities
Available-
for-sale –
Investments
and securities
3
–
–
(3)
–
–
–
–
–
–
37
2
4
(7)
–
(27)
(3)
6
–
–
–
3
–
–
–
–
(1)
2
–
–
–
–
–
–
7
–
–
7
–
–
1,430
79
51
(440)
86
(41)
(171)
994
(21)
–
8
–
4
(8)
–
–
–
4
–
–
£m
total
1,013
47
108
(58)
54
(21)
(77)
1,066
(25)
–
£m
Total
1,478
84
59
(458)
93
(68)
(175)
1,013
(21)
–
Year ended 31 december 2012
level 3 financial assets
At beginning of the year
(Losses)/gains recognised in
income statement
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
total level 3 financial assets
Losses relating to assets held at
31 December 2012 recognised in:
– income statement
– other comprehensive income
Year ended 31 December 2011
level 3 financial assets
At beginning of the year
Gains recognised in income statement
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
total level 3 financial assets
Losses relating to assets held at
31 December 2011 recognised in:
– income statement
– other comprehensive income
164
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 The table below shows the movement in Level 3 liabilities measured at fair value:
Year ended 31 december 2012
level 3 financial liabilities
At beginning of the year
Gains recognised in income statement
Purchases and issues
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
total level 3 financial liabilities
Gains relating to liabilities held at 31 December 2012 recognised in:
– income statement
– other comprehensive income
Year ended 31 December 2011
level 3 financial liabilities
At beginning of the year
(Gains)/losses recognised in income statement
Gains recognised in other comprehensive income
Sales and settlements
Transfers in
Transfers out
Foreign exchange and other
total level 3 financial liabilities
Losses relating to liabilities held at 31 December 2011 recognised in:
– income statement
– other comprehensive income
designated
fair value
through
income
statement
– life
assurance
policyholder
liabilities
(investment
contracts)
held-for-
trading –
derivatives
1
–
–
–
–
–
(1)
–
–
–
1,021
(129)
6
(425)
29
(8)
(14)
480
(98)
–
Designated fair
value through
income statement
– Life assurance
policyholder
liabilities
(investment
contracts)
Held-for-
trading –
Derivatives
£m
total
1,022
(129)
6
(425)
29
(8)
(15)
480
(98)
–
£m
Total
761
239
1
(52)
76
(10)
7
1
(1)
1
–
–
–
–
1
–
–
760
240
–
(52)
76
(10)
7
1,021
1,022
240
–
240
–
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of
varying the levels of the unobservable parameter using statistical techniques. When parameters are not amenable to statistical analysis,
quantification of uncertainty is judgemental.
When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most
favourable or most unfavourable change from varying the assumptions individually.
In respect of private equity investments, the valuations are assessed on an asset-by-asset basis using a valuation methodology appropriate to
the specific investment, in line with industry guidelines. In many of the methodologies, the principal assumption is the valuation multiple to be
applied to the main financial indicators including, for example, multiples for comparable listed companies and discounts for marketability.
For asset-backed securities whose prices are unobservable, models are used to generate the expected value of the asset, incorporating
benchmark information on factors such as prepayment patterns, default rates, loss severities and the historical performance of the underlying
assets. The models used are calibrated by using securities for which external market information is available.
For structured notes and other derivatives, principal assumptions concern the future volatility of asset values and the future correlation between
asset values. These principle assumptions include credit volatilities and correlations used in the valuation of the structured credit derivatives.
For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive
a volatility or correlation from comparable assets for which market data is more readily available, and examination of historical levels.
165
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
Analysis of reasonably possible alternative assumptions
The table below shows the effect of reasonably possible alternative assumptions on the fair value of Level 3 financial assets and liabilities:
Year ended 31 december 2012
level 3 financial assets
Held-for-trading (fair value through income statement)
Investments and securities
Designated (fair value through income statement)
Loans and advances
Investments and securities
total level 3 financial assets
level 3 financial liabilities
Designated (fair value through income statement)
Life assurance policyholder liabilities (investment contracts)
total level 3 financial liabilities
Year ended 31 December 2011
level 3 financial assets
Held-for-trading (fair value through income statement)
Loans and advances
Investments and securities
Derivative financial instruments – assets
Designated (fair value through income statement)
Investments and securities
total level 3 financial assets
level 3 financial liabilities
Designated (fair value through income statement)
Life assurance policyholder liabilities (investment contracts)
total level 3 financial liabilities
reflected in
income statement
£m
reflected in other
comprehensive income
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
1
1
98
1
97
99
64
64
64
1
1
101
1
100
102
64
64
64
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
reflected in
income statement
£m
reflected in other
comprehensive income
Favourable
changes
Unfavourable
changes
Favourable
changes
Unfavourable
changes
5
1
3
1
116
116
121
35
35
35
3
1
2
–
94
94
97
63
63
63
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
For the above analysis, the determination of the impacts of the favourable and unfavourable changes was based on a reasonable range of
favourable and unfavourable changes in the key inputs for the major types of Level 3 financial assets and liabilities, ranging from, for example,
a 10% change in the price earnings multiple for equity securities, to a 25% change in the discount rates applied to debt securities and volatility
assumptions in derivative contracts. Changes in other key inputs such as lapses and non-performance risk were also considered.
166
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Financial instruments designated as fair value through income statement
Certain items in the Group’s statement of financial position that would otherwise be categorised as loans and receivables under IAS 39 have
been designated as fair value through income statement. Information relating to the change in fair value of these items as it relates to credit risk
is shown in the table below:
change in fair value due to change in credit risk
Loans and advances
Investments and securities
Other financial assets
at 31 december 2012
maximum
exposure to
credit risk
current
financial
year
cumulative
4,068
7,404
24
11,496
(2)
3
–
1
(2)
(11)
–
(13)
Maximum
exposure to
credit risk
3,970
8,932
71
12,973
£m
At 31 December 2011
Current
financial
year
Cumulative
–
1
–
1
–
(17)
–
(17)
Certain items in the Group’s statement of financial position that would otherwise be categorised as financial liabilities at amortised cost under
IAS 39 have been designated as fair value through income statement. Information relating to the change in fair value of these items as it relates
to credit risk is shown in the table below:
change in fair value due to
change in credit risk
Borrowed funds
Amounts owed to bank depositors
current
financial
year
57
2
59
at 31 december 2012
cumulative
(12)
(4)
(16)
contractual
maturity
amount
887
5,718
6,605
fair value
919
5,728
6,647
Fair value
1,071
6,870
7,941
Current
financial
year
(23)
3
(20)
£m
At 31 December 2011
Cumulative
(69)
(6)
(75)
Contractual
maturity
amount
1,153
6,859
8,012
The fair values of other categories of financial liabilities designated as fair value through the income statement do not change significantly in
respect of credit risk.
The change in fair value due to change in credit risk shown above is determined as the amount of the change in fair value of the instrument that
is not attributable to changes in market conditions that give rise to market risk. For loans and receivables that have been designated as at fair
value through the income statement, individual credit spreads are determined at inception as the difference between the benchmark interest
rate and the interest rate charged to the client. Subsequent changes in the benchmark interest rate and the credit spread give rise to changes in
fair value of the financial instrument. Loans and advances are reviewed for observable changes in credit risk, and the credit spread is adjusted
at subsequent dates if there has been an observable change in credit risk relating to a particular loan or advance. No credit derivatives are
used to hedge the credit risk on any of the financial assets designated at fair value through the income statement. The change in fair value due
to credit risk of financial liabilities designated at fair value through the income statement has been determined as the difference between fair
values determined using a liability curve (adjusted for credit) and a risk-free liability curve. This difference is cross-checked to market-related
data on credit spreads, where available.
(q) Risks
Market risk
(i) Overview
Market risk is the risk of a financial impact arising from the changes in values of financial assets or financial liabilities from changes in equity,
bond and property prices, interest rates and foreign exchange rates. Market risk arises differently across the Group’s businesses depending on
the types of financial assets and liabilities held.
Each of the Group’s business units has an established set of policies, principles and governance processes to manage market risk within their
individual businesses and in accordance with their local regulatory requirements. A monitoring process established at a Group level overlies
these individual approaches to the management of market risk.
The impacts of changes in market risk are monitored and managed through the business units’ own regulatory processes, with reference to the
Group’s economic capital processes, and by other means. The sensitivity of the Group’s earnings, capital position and embedded value is
monitored through the Group’s embedded value and economical capital reporting processes.
(ii) Insurance operations
For the Group’s insurance operations, equity property, volatility and interest rate risk exposure are quantified in accordance with the Group’s
risk-based capital practices, which require sufficient capital to be held in excess of the statutory minimum. Additional detail is provided in the
Risk and Capital Management section.
In South Africa the stock selection and investment analysis process is supported by a well-developed research function. For fixed annuities,
market risks are managed where possible by investing in fixed interest securities with a duration closely corresponding to those liabilities.
Market risk on policies that include specific guarantees and where shareholders carry the investment risk, principally reside in the South African
guaranteed non-profit annuity book, which is closely matched with gilts and semi-gilts. Other non-profit policies are also suitably matched
based upon comprehensive investment guidelines. Market risk on with-profit policies, where investment risk is shared, is minimised by
appropriate bonus declaration practices (in line with our Principles and Practices of Financial Management) and hedging.
167
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
(q) Risks continued
Market risk continued
(ii) Insurance operations continued
For the variable annuity business in Old Mutual Bermuda, market risk to shareholders arises from offering policyholder guaranteed returns. In
addition, these guarantees are US dollar denominated and a significant portion of the underlying assets invested in by Old Mutual Bermuda’s
clients are exposed to currencies other than US dollar. The market and currency risk is dynamically managed, with the overall exposures to
changes in markets monitored closely so that timely actions can be taken to re-establish hedging as required.
In Old Mutual Wealth’s unit-linked assurance operations, the Group has limited exposure to the volatility from equity markets because, in the
main, equity risk is borne by policyholders (subject to the impact on asset-based fees charged on policyholder funds). In respect of Old Mutual
Wealth’s shareholders’ funds, equity risks are addressed in Old Mutual Wealth’s investment policy, which provides for very limited opportunity
for entities to invest their own capital in equities and equity funds.
In some areas of Old Mutual Wealth’s business, most notably its traditional life insurance business, Old Mutual Wealth is exposed to market
risks arising from various forms of guarantees. Typically the policyholder is guaranteed a certain return regardless of the asset return achieved
during the term of the policy. These risks are closely monitored and mitigated by applying asset and liability management techniques, ensuring
that the proceeds from sale of assets are sufficient to meet the obligations to policyholders.
Sensitivities to adverse impacts of changes in market prices arising in the Group’s insurance operations are set out in the Old Mutual audited
Market Consistent Embedded Value supplementary basis information section of the Annual Report and Accounts on pages 247 and 248.
(iii) Banking operations
The principal market risks arising in the Group’s banking operations arise from:
■ Trading risk in Nedbank Capital; and
■ Banking book interest rate risk from repricing and/or maturity mismatches between on- and off-balance sheet components in all
banking businesses.
A comprehensive market risk framework is used to ensure that market risks are understood and managed. Governance structures are in place
to achieve effective independent monitoring and management of market risk.
Trading risk
Market risk exposures from trading activities at Nedbank Capital are measured using Value-at-Risk (VaR), supplemented by sensitivity analysis,
and stress-scenario analysis, and limit structures are set accordingly.
The VaR risk measure for Nedbank estimates the potential loss in pre-tax profit over a given holding period for a specified confidence level.
The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification
by recognising offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and
products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by Nedbank represents
the overnight loss that has less than 1% chance of occurring under normal market conditions. By its nature, VaR is only a single measure and
cannot be relied upon on its own as a means of measuring and managing risk.
at 31 december
historical var (one-day, 99%) by risk type
Foreign exchange
Interest rate
Equity product
Other
Diversification
total var exposure
average
minimum
maximum
£m
Year-end
2012
2011
2012
2011
2012
2011
2012
2011
0.3
0.6
0.3
0.3
(0.5)
1.1
0.3
0.7
0.3
0.2
(0.5)
1.0
0.1
0.3
0.1
0.1
–
0.5
0.1
0.4
0.2
0.1
–
0.8
1.1
1.1
0.9
0.5
–
2.4
1.1
1.1
0.8
0.4
–
3.4
0.1
0.4
0.2
0.3
(0.4)
0.6
0.3
0.4
0.7
0.3
(0.6)
1.1
Banking book interest rate risk
Banking book interest rate risk at Nedbank arises because:
■ The bank writes a large quantum of prime-linked assets and raises fewer prime-linked deposits
■ Funding is prudently raised across the curve at fixed-term deposit rates that re-price only on maturity
■ Short-term demand-funding products re-price to different short-end base rates
■ Certain ambiguous maturity accounts are non-rate-sensitive; and
■ The bank has a mismatch in net non-rate-sensitive balances, including shareholders’ funds that do not re-price for interest rate changes.
168
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Nedbank uses standard analytical techniques to measure interest rate sensitivity within its banking book. This includes static re-price gap analysis
and a point-in-time interest income stress testing for parallel interest rate moves over a forward-looking 12-month period. At 31 December 2012
the sensitivity of the banking book to a 1% instantaneous reduction in interest rates would have led to a reduction in net interest income and
equity of £59 million (2011: £67 million).
The table below shows the re-pricing profile of Nedbank’s banking book, which highlights the fact that assets re-price quicker than liabilities
following derivative hedging activities:
at 31 december 2012
Interest rate re-pricing gap
Total assets
Total liabilities and shareholders’ funds
Interest rate hedging activities
Repricing profile
Cumulative repricing profile
Expressed as a % of total assets
At 31 December 2011
Interest rate re-pricing gap
Total assets
Total liabilities and shareholders’ funds
Interest rate hedging activities
Repricing profile
Cumulative repricing profile
Expressed as a % of total assets
up to 3
months
3 to 6
months
6 months
to 1 year
1 to 5
years
over
5 years
trading and
non-rate
33,489
30,353
425
3,561
3,561
7.2%
1,156
1,971
1,593
778
4,339
8.7%
1,316
1,643
959
632
4,971
10.0%
3,358
1,275
(2,057)
26
4,997
10.1%
1,366
177
(920)
269
5,266
10.6%
8,914
14,180
–
(5,266)
–
–
Up to 3
months
3 to 6
months
6 months
to 1 year
1 to 5
years
Over
5 years
Trading and
non-rate
38,262
32,895
(236)
5,131
5,131
9.9%
704
2,371
1,496
(171)
4,960
9.6%
510
2,021
1,083
(428)
4,532
8.8%
2,782
1,507
(1,336)
(61)
4,471
8.7%
1,165
154
(1,007)
4
4,475
8.7%
8,162
12,637
–
(4,475)
–
–
£m
total
49,599
49,599
–
–
–
–
£m
Total
51,585
51,585
–
–
–
–
(r) Capital management
The Group actively manages its capital with a focus on capital efficiency and effective risk management. The capital objectives are to maintain
the Group’s ability to continue as a going concern while supporting the optimisation of return relative to the risks. The Group ensures that it can
meet its expected capital and financing needs at all times having regard to the Group’s business plans, forecasts and strategic initiatives. The
Group’s overall capital risk appetite is set with reference to the requirements of the relevant stakeholders and seeks to:
■ Maintain sufficient, but not excessive, financial strength to support stakeholder requirements
■ Optimise debt to equity structure to enhance shareholder returns
■ Retain financial flexibility by maintaining liquidity including unutilised committed credit lines.
The primary sources of capital used by the Group are equity shareholders’ funds, preference shares, subordinated debt and borrowings.
Alternative resources are utilised where appropriate. Targets are established in relation to regulatory solvency, ratings, liquidity and dividend
capacity and are a key tool in managing capital in accordance with our risk appetite and the requirements of our various stakeholders.
The individual companies in the Group are subject to regulatory capital requirements at an individual level. In addition the Group as a whole is
subject to the solvency requirements of the Financial Groups Directive (FGD) as implemented by the FSA. Further detail as to the Group’s regulatory
capital surplus and that of subsidiaries is provided in the Annual Report. As at the date of issue of these financial statements the unaudited
pro-forma surplus was estimated to be £2.0 billion (2011: £2.2 billion). The FGD position will be submitted to the FSA by 30 April 2013.
It is critical that the Group’s capital management policies are aligned with the Group’s overall strategy, business plans and risk appetite. The
Group’s Capital Management Committee (GCMC) reviews the capital structure regularly. Further detail on the capital management is included
in the Risk and Capital Management section of the Annual Report and Accounts.
(s) Currency translation risk
The Group is exposed, from an earnings and capital perspective, to movements in exchange rates reducing the sterling value of subsidiaries’
assets and earnings denominated in foreign currencies. The functional currencies of its principal operations, other than for the UK operations,
are South African rand, US dollar, and euro. The Group reduces this risk through the use of currency swaps, currency borrowings and forward
foreign exchange contracts. Such risk mitigation techniques are reflected in the currency analyses that follow.
The exposure to currency risk on the policyholder funds is included under market risk as discussed above.
169
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e1: Group statement of financial position continued
(s) Currency translation risk continued
The tables below show the Group’s statement of financial position by major currency:
Zar
pounds
usd
eur
seK
other
906
147
35,572
32,261
1,618
1,609
1,649
73,762
3,013
76,775
30,506
1,515
2,381
3,230
36,704
1,367
75,703
851
76,554
–
1,229
365
30,685
312
109
1,223
33,923
2,283
36,206
30,761
1,257
659
600
534
7
33,818
609
34,427
2
–
1,495
10,748
758
49
515
13,567
1,322
14,889
6,486
11
10
486
1,136
27
8,156
40
8,196
–
3
298
8,675
129
6
240
9,351
799
10,150
8,504
–
–
156
280
–
8,940
348
9,288
–
–
24
1,426
13
–
1
1,464
–
1,464
1,410
–
–
12
8
–
1,430
–
1,430
13
27
741
2,586
60
8
235
3,670
343
4,013
2,521
–
–
305
837
1
3,664
140
3,804
ZAR
POUNDS
USD
EUR
SEK
Other
944
124
38,679
31,517
1,737
1,336
1,571
75,908
3,154
79,062
29,597
1,024
2,512
2,863
40,143
1,296
77,435
842
78,277
–
836
154
27,624
219
445
1,137
30,415
2,573
32,988
27,418
853
967
616
88
445
30,387
811
31,198
3
1
938
10,668
1,007
67
596
13,280
1,464
14,744
7,134
16
11
400
736
73
8,370
35
8,405
–
3
134
7,724
148
(55)
180
8,134
1,890
10,024
7,878
–
166
148
190
(59)
8,323
1,307
9,630
–
–
10
1,231
–
–
–
1,241
20,943
22,184
1,205
–
–
12
–
–
1,217
19,280
20,497
4
25
86
2,489
237
2
140
2,983
400
3,383
3,118
–
–
204
58
–
3,380
140
3,520
£m
total
921
1,406
38,495
86,381
2,890
1,781
3,863
135,737
7,760
143,497
80,188
2,783
3,050
4,789
39,499
1,402
131,711
1,988
133,699
£m
Total
951
989
40,001
81,253
3,348
1,795
3,624
131,961
30,424
162,385
76,350
1,893
3,656
4,243
41,215
1,755
129,112
22,415
151,527
at 31 december 2012
assets
Mandatory reserve deposits with central banks
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total financial assets
Total non-financial assets
total assets
liabilities
Life assurance policyholder liabilities
Third-party interest in consolidation of funds
Borrowed funds
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Total financial liabilities
Total non-financial liabilities
total liabilities
At 31 December 2011
assets
Mandatory reserve deposits with central banks
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
Total financial assets
Total non-financial assets
total assets
liabilities
Life assurance policyholder liabilities
Third-party interest in consolidation of funds
Borrowed funds
Trade, other payables and other liabilities
Amounts owed to bank depositors
Derivative financial instruments – liabilities
Total financial liabilities
Total non-financial liabilities
total liabilities
170
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 The Group’s exposure to currency translation risk is predominantly to South African rand, US dollar and EURO. The risk of changes in the value
of these currencies in relation to pounds is partially mitigated due to the unit-linked investments and policyholder liabilities absorbing such changes.
A 10% reduction in the rates used to translate the major currencies shown above to pounds (as set out in note A1) would result in a reduction in profit
after tax of £207 million (2011: £118 million).
The Group reduces the risk to foreign currency fluctuations through the use of currency swaps, currency borrowings and forward foreign exchange
contracts (note E6). The Group further reduces its exposure to foreign exchange movements through net investment hedges (note E7). There are no
direct exposures to the unit-linked investments and related policyholder liabilities.
e2: credit risk
Overall exposure to credit risk
The Group is exposed to banking credit risk from lending and other financing activities, through its exposure to Nedbank. Nedbank’s lending
portfolio forms a substantial part of the Group’s loans and advances, as analysed in Note E3. Credit risk represents the most significant risk type
facing Nedbank, accounting for 58% of its economic capital requirements. Nedbank’s credit risk profile is managed in terms of its credit risk
management framework, which encompasses comprehensive credit risk policy, mandate (limits) and governance structures, and is approved by the
Nedbank Board.
The Group is also exposed to the risk of credit defaults and to a much lesser extent movements in credit spreads from our insurance businesses.
This includes counterparty default risk, which arises mainly from lending activities, and reinsurance and hedging arrangements.
The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a
means of mitigating the financial loss from defaults. The Group’s exposure and the credit rating of its counterparties are continuously monitored
and the aggregate value of transactions concluded is spread amongst approved counterparties.
The Group does not have significant credit exposure to any single counterparty or any group of counterparties having similar characteristics.
The credit risk on liquid funds, derivative financial instruments and portfolios of debt and similar securities is limited because the counterparties
are banks with high credit ratings assigned by international credit rating agencies and limits are placed on exposures to below investment-
grade holdings.
Other than the above, the Group has other limited credit risk exposures in respect of amounts due from policyholders, intermediaries and
reinsurers. None of the life assurance operations cedes significant risk through reinsurance and any loans to policyholders are secured on the
surrender value of the relevant policies.
The table below represents the Group’s maximum exposure to credit risk, without taking into account the value of any collateral obtained. The
total credit exposure also includes potential exposure arising from financial guarantees given by the Group and undrawn loan commitments,
which are not yet reflected in the Group’s statement of financial position.
Mandatory reserve deposits with central banks
Reinsurers’ share of policyholder liabilities
Loans and advances
Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Short-term funds and securities treated as investments
Other
Other assets
Derivative financial instruments – assets
Cash and cash equivalents
Financial guarantees and other credit-related contingent liabilities
Loan commitments and other credit-related commitments
Non-current assets held for sale
£m
at
31 december
2012
At
31 December
2011
921
1,406
38,495
20,444
6,723
10,713
2,892
116
2,581
1,781
3,863
3,255
5,532
42
78,320
951
989
40,001
20,049
6,476
10,909
2,536
128
3,050
1,795
3,624
3,030
5,578
10,852
89,919
(i) Financial collateral
The Group takes financial collateral to support exposures in its banking and securities and lending activities. Collateral held includes cash and
debt securities. Cash collateral is included as part of cash equivalents.
These transactions are entered into under terms and conditions that are standard industry practice to securities borrowing and lending activities.
(ii) Non-financial collateral
The Group takes other physical collateral to recover outstanding lending exposures in the event of the borrower being unable or unwilling to
fulfil its obligations. This includes mortgage over property (both residential and commercial), and liens over business assets (including, but not
limited to plant, vehicles, aircraft, inventories and trade debtors) and guarantees from parties other than the borrower.
171
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e2: credit risk continued
Overall exposure to credit risk continued
Should a counterparty be unable to settle its obligations, the Group takes possession of collateral as full or part settlement of such amounts.
In general, the Group seeks to dispose of such property and other assets that are not readily convertible into cash as soon as the market for
the relevant asset permits.
A further analysis of credit risk is provided in notes E3, E4, E5 and F5.
e3: loans and advances
(a) Summary
Home loans
Commercial mortgages
Properties in possession
Credit cards
Overdrafts
Policyholder loans
Other loans to clients
Preference shares and debentures
Net finance leases and instalment debtors
Gross investment
Unearned finance charges
Factoring accounts
Trade, other bills and bankers’ acceptances
Term loans
Remittances in transit
Deposits placed under reverse purchase agreements
Gross loans and advances
Provisions for impairment
Specific provisions
Portfolio provision
total net loans and advances
£m
at
31 december
2012
At
31 December
2011
9,899
7,098
42
727
994
249
4,945
1,231
5,503
5,761
(258)
324
2
6,417
14
1,840
11,395
7,122
49
690
1,047
256
5,475
1,429
5,664
5,918
(254)
304
3
6,206
16
1,260
39,285
40,916
(541)
(249)
(696)
(219)
38,495
40,001
Non-performing loans included above had a book value less impairment provisions of £859 million (2011: £1,096 million).
Of the loans and advances shown above, £13,038 million (2011: £12,471 million) is receivable within one year of the reporting date and is
regarded as current. £25,457 million (2011: £27,293 million) is regarded as non-current based on the maturity profile of the assets.
Of the gross loans and advances shown above, £38,963 million (2011: £40,189 million) relates to balances held by the Group’s banking operations.
The table below gives an age analysis of loans and advances representing primarily the exposures of the Group’s banking operations:
Neither past due nor impaired
Past due but not impaired
Past due but less than 1 month
Past due, greater than 1 month but less than 3 months
Past due, greater than 3 months but less than 6 months
Past due, greater than 6 months but less than 1 year
Past due more than 1 year
Impaired loans and advances individually impaired
Gross loans and advances
Provisions for impairment
total net loans and advances
172
£m
at
31 december
2012
At
31 December
2011
34,691
3,194
2,718
442
7
–
27
1,400
39,285
(790)
38,495
35,699
3,381
2,856
493
2
1
29
1,836
40,916
(915)
40,001
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 The neither past due nor impaired loans and advances can be further analysed by credit rating as follows:
at 31 december 2012
£m
At 31 December 2011
Investment
grade
sub-
investment
grade
not rated
Home loans
Commercial mortgages
Credit cards
Overdrafts
Policyholder loans
Other loans to clients
Preference shares and debentures
Net finance leases and
instalment debtors
Factoring accounts
Trade, other bills and bankers’
acceptances
Term loans
Remittances in transit
Deposits placed under reverse
purchase agreements
1,408
2,595
25
168
173
3,189
1,020
211
11
–
4,043
7
1,831
6,377
4,131
597
625
–
1,565
185
4,338
306
1
929
2
9
395
86
–
102
48
98
26
133
–
1
51
5
total
8,180
6,812
622
895
221
4,852
1,231
4,682
317
2
5,023
14
–
1,840
Investment
grade
Sub-
investment
grade
Not rated
779
2,185
111
182
192
3,620
1,210
337
–
2
3,995
7
1,257
13,877
8,019
4,412
482
671
–
1,386
202
4,125
290
1
880
–
–
443
116
–
89
61
323
14
246
–
–
53
6
3
20,468
1,354
Total
9,241
6,713
593
942
253
5,329
1,426
4,708
290
3
4,928
13
1,260
35,699
Gross loans and advances
14,681
19,065
945
34,691
Collateral is held as security against certain loans and advances detailed above, with this principally consisting of cash, properties and letters
of credit.
Movements in provisions for impairment of loans and advances are analysed as follows:
Balance at beginning of the year
Acquisitions through business combinations
Income statement charge
Recoveries of amounts previously written off
Amounts written off against the provision
Foreign exchange and other movements
Balance at end of the year
at 31 december 2012
£m
At 31 December 2011
specific
impairment
portfolio
impairment
total
impairment
Specific
impairment
Portfolio
impairment
Total
impairment
696
–
414
(66)
(514)
11
541
219
–
52
–
–
(22)
249
915
–
466
(66)
(514)
(11)
790
886
(3)
463
(55)
(486)
(109)
696
218
(8)
50
–
–
(41)
219
1,104
(11)
513
(55)
(486)
(150)
915
The majority of loans and advances are in respect of Nedbank, which believes it has continued to make good progress in improving asset
quality. In local currency terms Nedbank experienced a reduction in the impairment charge for the year. Given the levels of overall consumer
indebtedness, credit risk management remained a strong area of focus. The reduction in specific impairments was driven by a decrease in
defaulted advances, while there was further strengthening of the portfolio impairments charge mainly on the performing personal loans,
Motor Finance Corporation (MFC) and home loans books. The increased level of portfolio impairments was mainly as a result of further model
conservatism and book growth in personal loans, as well as the lengthening of the emergence period in the MFC book. Impairments in
Nedbank’s Retail division were maintained within target levels, reflecting the effect of asset mix changes as unsecured lending attracts higher
levels of impairments than secured lending. Nedbank Wealth’s impairment ratios deteriorated mainly due to the impact of a subdued property
market. Further detail on Nedbank is available at www.nedbank.co.za.
During the year under review, the Group recognised collateral of £42 million (2011: £49 million) in the statement of financial position. These
amounts are being included in the loans and advances above as properties in possession.
(b) Finance lease and instalment debtors
minimum lease payments
receivable
Present value of minimum lease
payments receivable
£m
amounts receivable under finance leases – at 31 december
Within one year
In the second to fifth years inclusive
After five years
Less: unearned finance income
present value of minimum lease payments receivable
2012
766
3,632
1,363
5,761
(258)
5,503
2011
816
5,094
8
5,918
(254)
5,664
2012
665
3,476
1,362
5,503
–
5,503
The accumulated allowance for uncollectable minimum lease payments receivable is £158 million (2011: £190 million).
2011
718
4,939
7
5,664
–
5,664
173
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e4: Investments and securities
Government and government-guaranteed securities
Other debt securities, preference shares and debentures
Listed
Unlisted
Equity securities
Listed
Unlisted
Pooled investments
Listed
Unlisted
Short-term funds and securities treated as investments
Other
total investments and securities
£m
at
31 december
2012
At
31 December
2011
6,723
10,713
7,401
3,312
16,382
15,523
859
49,555
2,479
47,076
2,892
116
86,381
6,476
10,909
7,059
3,850
17,505
16,639
866
43,699
7,301
36,398
2,536
128
81,253
Investments and securities are regarded as current and non-current assets based on the intention with which the financial assets are held as
well as their contractual maturity profile. Of the amounts shown above, £50,529 million (2011: £45,131 million) is regarded as current and
£35,852 million (2011: £36,122 million) is regarded as non-current.
(a) Debt instruments and similar securities
The following table shows an age analysis of the portfolio of debt instruments and similar securities:
Neither past due nor impaired
Past due but not impaired
total debt instruments and similar securities
£m
at
31 december
2012
At
31 December
2011
20,373
–
20,373
20,039
10
20,049
The following table shows an analysis of the carrying values of the Group’s portfolio of debt and similar securities according to their credit
rating (Standard & Poor’s or equivalent), by investment grade.
The neither past due nor impaired loans and advances can be further analysed by credit rating as follows:
at 31 december 2012
Investment
grade
(aaa to BBB)
sub-
Investment
grade
(BB and
lower)
not rated
total
Investment
grade
(AAA to BBB)
Sub-
investment
grade
(BB and
lower)
£m
At 31 December 2011
Not rated
Total
Government and government-related
securities
Other debt securities, preference shares
and debentures
Short-term funds and securities
Other
5,665
1
1,057
6,723
5,395
56
1,025
6,476
7,009
1,286
–
13,960
130
–
–
131
3,574
1,606
45
6,282
10,713
2,892
45
20,373
6,955
926
–
13,276
176
–
–
232
3,778
1,610
128
6,541
10,909
2,536
128
20,049
In general, no collateral is taken in respect of the Group’s holdings of debt instruments and similar securities.
174
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 e5: securities lending
The Group participates in securities lending where securities holdings are lent to third parties. The loaned securities are not removed from the
Group’s consolidated statement of financial position but are retained within the relevant investment classification. Collateral is held in respect
of the loaned securities.
The table below represents the amounts lent and the related collateral received:
amounts lent under securities lending
Equity
Debt securities
amounts received as collateral for securities lending
Equity
Debt securities
£m
at
31 december
2012
At
31 December
2011
460
433
893
883
85
968
471
296
767
695
72
767
The cash collateral has been recognised in the statement of financial position with a corresponding liability to return the collateral included in
other liabilities. Of the collateral included in the table above, £893 million (2011: £767 million) can be sold or repledged and £nil (2011: £nil)
has been sold or repledged.
At 31 December 2012, the Group has provided £150 million (2011: £114 million) in debt securities collateral under repurchase arrangements.
At 31 December 2012 and 31 December 2011, the Group has not provided any cash collateral.
e6: derivative financial instruments – assets and liabilities
The Group utilises derivative instruments for both hedging and non-hedging purposes. The derivative instruments become in-the-money or
out-of-the-money as a result of fluctuations in market interest rates, foreign exchange rates or asset prices relative to their terms. The aggregate
contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are in-the-money or out-of-the-
money and, therefore, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time.
The Group undertakes transactions involving derivative financial instruments with other financial institutions. Management has established
limits commensurate with the credit quality of the institutions with whom it deals, and manages the resulting exposures such that a default by any
individual counterparty is unlikely to have a materially adverse impact on the Group.
The following tables provide a detailed breakdown of the Group’s derivative financial instruments outstanding at year-end. These instruments
allow the Group and its customers to transfer, modify or reduce their credit, equity market, foreign exchange and interest rate risks.
derivative financial instruments
£m
liabilities
at 31 december
Equity derivatives
Exchange rate contracts
Interest rate contracts
Credit derivatives
Other derivatives
total
2012
54
248
1,415
13
51
1,781
assets
2011
37
281
1,070
19
388
1,795
2012
41
93
1,217
11
40
1,402
The contractual maturities of the derivative liabilities held are as follows:
derivative financial liabilities
at 31 december 2012
At 31 December 2011
carrying
amount
less than
3 months
more than 3
months less
than 1 year
Between
1 and
5 years
1,402
1,755
74
451
296
326
607
515
more
than
5 years
522
675
no
contractual
maturity
date
–
–
2011
46
293
977
19
420
1,755
£m
total
1,499
1,967
175
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e7: hedge accounting
Net investment hedges
The Group uses a combination of currency swaps, forward foreign exchange contracts and debt raised in the currency of the exposure to
mitigate the translation effect of holding overseas companies. The following table summarises the Group’s open positions with respect to
financial instruments utilised for net investment hedging purposes. There was no ineffectiveness in respect of the net investment hedges during
the financial year (2011: £nil).
open positions
Forward contracts
Currency swaps
at 31 december 2012
£m
At 31 December 2011
usd
Zar
seK
USD
ZAR
SEK
–
112
112
392
–
392
–
–
–
–
62
62
100
–
100
–
479
479
£m
fair value of financial instruments designated as net investment hedges
ZAR forward foreign exchange contracts
USD cross currency swap
£500 million cross currency swap
€200 million cross currency swap
at
31 december
2012
At
31 December
2011
(8)
29
–
–
21
(1)
(1)
64
23
85
The ZAR forwards are designated as hedges against the foreign currency risk in respect of the Group’s investment in its South African operations.
The USD forwards are designated as hedges against the foreign currency risk in respect of the Group’s investment in its US operations.
e8: Insurance and investment contracts
Life assurance
Classification of contracts
Contracts sold as life assurance (with the exception of unit-linked assurance contracts) are categorised into insurance contracts, contracts with
a discretionary participation feature or investment contracts, being in accordance with the classification criteria set out in the following
paragraphs.
For the Group’s unit-linked assurance business, contracts are separated into an insurance component and an investment component (known
as unbundling), and each unbundled component is accounted for separately in accordance with the accounting policy for that component.
Unit-linked assurance contracts are savings contracts with a small or insignificant component of insurance risk.
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts.
Such contracts include savings and/or investment contracts sold without life assurance protection.
Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the
policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder are classified as
insurance contracts. Insurance risk is risk other than financial risk. Contracts accounted for as insurance contracts include life assurance contracts
and savings contracts providing more than an insignificant amount of life assurance protection.
Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, security index, commodity price,
foreign exchange rate, index of prices or rates, a credit rating or credit index, or other variable, provided, in the case of a non-financial
variable, that the variable is not specific to a party to the contract.
Contracts with a discretionary participating feature are those under which the policyholder holds a contractual right to receive additional
payments as a supplement to guaranteed minimum payments. These additional payments, the amount or timing of which is at the Group’s
discretion, represent a significant portion of the total contractual payments and are contractually based on (1) the performance of a specified
pool of contracts or a specified type of contract, (2) realised and/or unrealised investment returns on a specified pool of assets held by the
Group or (3) the profit or loss of the Group. Investment contracts with discretionary participating features, which have no life assurance
protection in the policy terms, are accounted for in the same manner as insurance contracts.
176
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Premiums on life assurance
Premiums and annuity considerations receivable under insurance contracts and investment contracts with a discretionary participating feature
are stated gross of commission, and exclude taxes and levies. Premiums in respect of linked insurance contracts are recognised when the liability
is established. Premiums in respect of other insurance contracts and investment contracts with a discretionary participating feature are recognised
when due for payment.
Outward reinsurance premiums are recognised when due for payment.
Amounts received under investment contracts other than those with a discretionary participating feature and unit-linked assurance contracts
are recorded as deposits and credited directly to investment contract liabilities.
Revenue on investment management service contracts
Fees charged for investment management services provided in conjunction with an investment contract are recognised as revenue as the services
are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over
the anticipated period in which services will be provided. Fees charged for investment management service contracts by asset management
businesses are also recognised on this basis.
Claims paid on life assurance
Claims paid under insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities,
surrenders, death and disability payments.
Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for
when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Amounts paid under investment contracts other than those with a discretionary participating feature and unit-linked assurance contracts are
recorded as deductions from investment contract liabilities.
Insurance contract provisions
Insurance contract provisions for African businesses have been computed using a gross premium valuation method. Provisions in respect of
African business have been made in accordance with the Financial Soundness Valuation basis as set out in the guidelines issued by the
Actuarial Society of South Africa in Standard of Actuarial Practice (SAP) 104 (2012). Under this guideline, provisions are valued using realistic
expectations of future experience, with margins for prudence and deferral of profit emergence.
Provisions for investment contracts with a discretionary participating feature are also computed using the gross premium valuation method in
accordance with the Financial Soundness Valuation basis. Surplus allocated to policyholders but not yet distributed related to these contracts is
included as part of life assurance policyholder liabilities.
Reserves on immediate annuities and guaranteed payments are computed on the prospective deposit method, which produces reserves equal
to the present value of future benefit payments.
For other territories, the valuation bases adopted are in accordance with local actuarial practices and methodologies.
Derivatives embedded in an insurance contract are not separated and measured at fair value if the embedded derivative itself qualifies for
recognition as an insurance contract. In this case the entire contract is measured as described above.
The Group performs liability adequacy testing at a business unit level on its insurance liabilities to ensure that the carrying amount of its
liabilities (less related deferred acquisition costs and intangible assets) is sufficient in view of estimated future cash flows. When performing the
liability adequacy test, the Group discounts all contractual cash flows and compares this amount to the carrying value of the liability at discount
rates appropriate to the business in question. Where a shortfall is identified, an additional provision is made.
The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the income statement
as they occur.
Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recoveries are fairly stated on the basis of
the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in
significant adjustments to the amount provided.
In respect of the South Africa life assurance, shadow accounting is applied to insurance contract provisions where the underlying measurement
of the policyholder liability depends directly on the value of owner-occupied property and the unrealised gains and losses on such property,
which are recognised in other comprehensive income. The shadow accounting adjustment to insurance contract provisions is recognised in
other comprehensive income to the extent that the unrealised gains or losses on owner-occupied property backing insurance contract
provisions are also recognised directly in other comprehensive income.
Financial guarantee contracts are recognised as insurance contracts. Liability adequacy testing is performed to ensure that the carrying
amount of the liability for financial guarantee contracts is sufficient.
177
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e8: Insurance and investment contracts continued
Investment contract liabilities
Investment contract liabilities in respect of the Group’s non-linked business are recorded at amortised cost unless they are designated at fair
value through the income statement in order to eliminate or significantly reduce a measurement or recognition inconsistency, for example where
the corresponding assets are recorded at fair value through the income statement.
Investment contract liabilities in respect of the Group’s linked business are recorded at fair value. For such liabilities, including the deposit
component of unbundled unit-linked assurance contracts, fair value is calculated as the account balance, which is the value of the units
allocated to the policyholder, based on the bid price of the assets in the underlying fund (adjusted for tax).
Investment contract liabilities measured at fair value are subject to a ‘deposit floor’ such that the liability established cannot be less than the
amount repayable on demand.
Acquisition costs
Acquisition costs for insurance contracts comprise all direct and indirect costs arising from the sale of insurance contracts.
As the gross premium valuation method used in African territories to determine insurance contract provisions makes implicit allowance for the
deferral of acquisition costs, no explicit deferred acquisition cost asset is recognised in the statement of financial position for the contracts
issued in these areas.
Deferral of costs on insurance business in other territories is limited to the extent that they are deemed recoverable from available future margins.
Costs incurred in acquiring investment management service contracts
Incremental costs that are directly attributable to securing an investment management service contract are recognised as an asset if they can be
identified separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs represent the contractual
right to benefit from providing investment management services and are amortised as the related revenue is recognised. Costs attributable to
investment management service contracts in the asset management businesses are also recognised on this basis.
General insurance
Contracts under which the Group accepts significant insurance risk from another party and are not classified as life insurance are classified as
general insurance. All classes of general insurance business are accounted for on an annual basis.
Premiums in general insurance
Premiums stated gross of commissions exclude taxes and levies and are accounted for in the period in which the risk commences. The proportion
of the premiums written relating to periods of risk after the reporting date is carried forward to subsequent accounting periods as unearned
premiums, so that earned premiums relate to risks carried during the accounting period.
Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance.
Claims on general insurance
Claims incurred comprise the settlement and handling costs of paid and outstanding claims arising during the year and adjustments to prior year
claim provisions. Outstanding claims comprise claims incurred up to, but not paid, at the end of the accounting period, whether reported or not.
Outstanding claims do not include any provision for possible future claims where the claims arise under contracts not in existence at the
reporting date.
The Group performs liability adequacy testing at a business unit level on its claim liabilities to ensure that the carrying amount of its liabilities
(less related deferred acquisition costs and the unearned premium reserve) is sufficient in view of estimated future cash flows.
Whilst the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the
information currently available to them, the ultimate liability will vary as a result of subsequent information and events, and may result in
significant adjustments to the amount provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the
financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used and estimates
made are reviewed regularly.
Acquisition costs on general insurance
Acquisition costs, which represent commission and other related expenses, are deferred and amortised over the period in which the related
premiums are earned.
Reinsurance
The Group cedes reinsurance in the normal course of business for the purpose of limiting its net loss potential through the diversification of its
risks. Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets,
liabilities, income and expense from the related insurance contracts because the reinsurance arrangements do not relieve the Group from its
direct obligations to its policyholders.
Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets. Rights under
contracts that do not transfer significant insurance risk are accounted for as financial instruments.
178
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Reinsurance premiums for ceded reinsurance are recognised as an expense on a basis that is consistent with the recognition basis for the
premiums on the related insurance contracts. For general insurance business, reinsurance premiums are expensed over the period that the
reinsurance cover is provided, based on the expected pattern of the reinsured risks. The unexpensed portion of ceded reinsurance premiums
is included in reinsurance assets.
The net amounts paid to a reinsurer at the inception of a contract may be less than the reinsurance assets recognised by the Group in respect of
its rights under such contracts. Any difference between the premium due to the reinsurer and the reinsurance asset recognised is included in the
income statement in the period in which the reinsurance premium is due.
The amounts recognised as reinsurance assets are measured on a basis that is consistent with the measurement of the provisions held in respect
of the related insurance contracts. Reinsurance assets include recoveries due from reinsurance companies in respect of claims paid.
Reinsurance assets are assessed for impairment at each reporting date. An asset is deemed impaired if there is objective evidence, as a result
of an event that occurred after its initial recognition, that the Group may not recover all amounts due, and that the event has a reliably
measurable impact on the amounts that the Group will receive from the reinsurer.
(a) Policyholder liabilities
The Group’s insurance and investment contracts are analysed as follows:
life assurance policyholder liabilities
Insurance contracts
Investment contracts
Unit-linked investment contracts and similar contracts
Other investment contracts
Discretionary participating investment contracts
Outstanding claims
General insurance liabilities
Claims incurred but not reported
Unearned premiums
Outstanding claims
at 31 december 2012
£m
At 31 December 2011
Gross
reinsurance
net
Gross
Reinsurance
Net
14,457
(129)
14,328
15,587
(94)
15,493
56,886
937
7,710
198
80,188
42
99
205
346
(1,159)
–
–
(19)
(1,307)
55,727
937
7,710
179
78,881
(3)
(45)
(51)
(99)
39
54
154
247
52,081
979
7,475
228
76,350
47
98
180
325
(781)
–
–
(16)
(891)
(4)
(47)
(47)
(98)
51,300
979
7,475
212
75,459
43
51
133
227
total policyholder liabilities
80,534
(1,406)
79,128
76,675
(989)
75,686
Of the £1,406 million (2011: £989 million) included in reinsurer’s share of life assurance policyholder and general insurance liabilities is an
amount of £1,314 million (2011: £925 million) which is classified as current, the remainder being non-current.
(b) Insurance contracts
Movements in the amounts outstanding in respect of life assurance policyholder liabilities, other than outstanding claims, are set out below:
Balance at beginning of the year
Income
Premium income
Investment income
Other income
expenses
Claims and policy benefits
Operating expenses
Currency translation (gain)/loss
Other charges and transfers
Taxation
transfer to operating profit
transfer to non-current liabilities held for sale
at 31 december 2012
£m
At 31 December 2011
Gross
reinsurance
net
Gross
Reinsurance
Net
15,587
(94)
15,493
19,177
(141)
19,036
2,035
1,965
5
(1,965)
(500)
(1,197)
(1,162)
(21)
(290)
–
(73)
–
–
60
1
6
(13)
–
(16)
–
1,962
1,965
5
(1,905)
(499)
(1,191)
(1,175)
(21)
(306)
–
2,001
682
3
(2,507)
(516)
(2,620)
(242)
(2)
(342)
(47)
(81)
–
–
69
–
10
40
–
8
1
1,920
682
3
(2,438)
(516)
(2,610)
(202)
(2)
(334)
(46)
Balance at end of the year
14,457
(129)
14,328
15,587
(94)
15,493
179
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e8: Insurance and investment contracts continued
(c) Unit-linked investment contracts and similar contracts, and other investment contracts
Balance at beginning of the year
New contributions received
Maturities
Withdrawals and surrenders
Fair value movements
Foreign exchange and other movements
Transfer to non-current liabilities held for sale
Balance at end of the year
(d) Discretionary participating investment contracts
Balance at beginning of the year
Income
Premium income
Investment income
expenses
Claims and policy benefits
Operating expenses
Other charges and transfers
Taxation
Currency translation gain
transfer to operating profit
Balance at end of the year
(e) Contractual maturity analysis
£m
at
31 december
2012
At
31 December
2011
53,060
7,868
(401)
(6,452)
5,092
(1,344)
–
57,823
70,683
10,086
(805)
(7,942)
(3,412)
(3,775)
(11,775)
53,060
£m
at
31 december
2012
At
31 December
2011
7,475
8,249
970
1,291
(1,000)
(172)
(31)
(12)
(728)
(83)
7,710
975
459
(996)
(96)
414
(6)
(1,468)
(56)
7,475
The following table is a maturity analysis of liability cash flows based on contractual maturity dates for investment contract liabilities and
discretionary participating financial instruments, and expected claim dates for insurance contracts.
The Group acknowledges that for general insurance the unearned premium provision, which will be recognised as earned premium in the
future, will most likely not lead to claim cash outflows equal to this provision. The Group has however adopted a conservative approach in
estimating future cash outflows associated with unearned premiums, by assuming a 100% combined ratio.
180
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 at 31 december 2012
life assurance policyholder liabilities
Insurance contracts
Investment contracts
Unit-linked investment contracts and similar contracts
Other investment contracts
Discretionary participating investment contracts
Outstanding claims
General insurance liabilities
Claims incurred but not reported
Unearned premiums
Outstanding claims
£m
undiscounted cash flows
carrying
amount
less than
3 months
more than
3 months
less than
1 year
Between
1 and 5
years
more than
5 years
total
14,457
1,977
1,478
6,755
19,594
29,804
56,886
937
7,710
198
80,188
42
99
205
346
52,516
716
7,488
194
62,891
18
51
65
134
580
80
–
1
2,139
14
46
62
122
1,173
137
–
–
8,065
2,727
20
–
–
22,341
56,996
953
7,488
195
95,436
10
1
79
90
–
–
–
–
42
98
206
346
total policyholder liabilities
80,534
63,025
2,261
8,155
22,341
95,782
At 31 December 2011
life assurance policyholder liabilities
Insurance contracts
Investment contracts
Unit-linked investment contracts and similar contracts
Other investment contracts
Discretionary participating investment contracts
Outstanding claims
General insurance liabilities
Claims incurred but not reported
Unearned premiums
Outstanding claims
£m
Undiscounted cash flows
Carrying
amount
Less than
3 months
More than
3 months
less than
1 year
Between
1 and 5
years
More than
5 years
Total
15,587
1,418
1,674
7,494
21,707
32,293
52,081
979
7,475
228
76,350
47
98
180
325
48,063
681
6,155
202
56,519
20
51
57
128
296
73
–
2
2,045
16
46
54
116
1,110
217
–
4
8,825
11
1
69
81
2,395
55
–
18
24,175
–
–
–
–
51,864
1,026
6,155
226
91,564
47
98
180
325
total policyholder liabilities
76,675
56,647
2,161
8,906
24,175
91,889
(f) Insurance risk
The Group assumes insurance risk by issuing insurance contracts, under which the Group agrees to compensate the policyholder or other
beneficiary if a specified uncertain future event (the insured event) affecting the policyholder occurs. Insurance risk includes mortality and
morbidity risk in the case of life assurance or risk of loss (from fire, accident, or other source) in the case of general insurance.
Insurance risk arises through exposure to unfavourable claims experience on life assurance, critical illness and other protection business and
exposure to unfavourable operating experience in respect of factors such as persistency levels and management expenses. Uncertainty in
persistency, expenses and mortality and morbidity claim rates, relative to the actuarial assumptions made in the pricing process, may prevent
the Group from achieving its profit objectives.
For accounting purposes insurance risk is defined as risk other than financial risk. Contracts issued by the Group may include both insurance
and financial risk; contracts with significant insurance risk are classified as insurance contracts, while contracts with no or insignificant insurance
risk are classified as investment contracts.
The Group has developed a risk policy which sets out the practices which are used to manage insurance risk and the management information
and stress testing requirements. The policy is cascaded to all entities across the Group who each have their own risk policy suite aligned to the
Group. As well as management of persistency, expense and claims experience, the risk policy sets requirements and standards on matters such
as underwriting and claims management practices, and the use of reinsurance to mitigate insurance risk.
181
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e8: Insurance and investment contracts continued
(f) Insurance risk continued
The insurance risk profile and experience is closely monitored to ensure that the exposure remains acceptable.
The financial impact of insurance risk events is examined through stress tests carried out within the MCEV and IFRS sensitivities, ICA and
Economic Capital assessment.
Mortality and morbidity
Mortality and morbidity risk is the risk that death, critical illness and disability claims are higher than expected, and recovery rates on disability
lower than expected. Possible causes are new and unexpected epidemics and widespread changes in lifestyle such as eating, smoking and
exercise habits. Higher than expected claims levels will reduce expected emerging profits. For contracts where the insured risk is survival, the
most significant factor that is likely to adversely impact the claims experience is continued improvement in medical science and social conditions
that increase longevity.
For unit-linked contracts a risk charge is applied to meet the expected cost of the insured benefit (in excess of the unit value). This risk charge can
be altered in the event of significant changes in the expectation for future claims experience, subject to ‘Treating Customers Fairly’ principles.
The operations manage mortality and morbidity risks through its underwriting policy and external reinsurance arrangements where its policy is
to retain certain types of insurance risks within specified maximum single event loss limits. Exposures above accepted limits are transferred to
reinsurance counterparties.
Persistency
Persistency risk is the risk of higher than expected policyholder surrenders, transfers or premium cessation on contracts, leading to a reduction
in financial profit.
In order to limit this risk to an acceptable level, products (including charging and commission structures) are designed to limit the risk of direct
financial loss on surrender, subject to ‘Treating Customers Fairly’ principles.
Persistency statistics are monitored monthly and a detailed persistency analysis at a product level is carried out on an annual basis.
Management actions may be triggered if statistics show significant adverse movement or emerging trends in experience.
Expenses
Expense risk is the risk that actual expenses and expense inflation exceed expected levels. This may result in emerging profit falling below the
Group’s profit objectives.
Expense levels are monitored quarterly against budgets and forecasts. An activity-based costing process is used to allocate costs relating to
processes and activities to individual product lines.
Some products’ structures include maintenance charges. These charges are reviewed annually in light of changes in maintenance expense
levels. This review may result in changes in charge levels, subject to ‘Treating Customers Fairly’ principles.
Tax
Tax risk is the risk that insufficient tax is collected from the policyholders because the projected taxation basis for basic life assurance business is
incorrect, resulting in contracts being incorrectly priced.
Tax risk also represents potential changes in the interpretation or application of prevailing tax legislation as paid by either policyholders or
shareholders, resulting in higher taxes reducing profitability or increasing shareholder tax burdens. The taxation position of the operations is
projected annually and tax changes will result in changes to new business pricing models as part of the annual control cycle. High risk issues
and emerging trends are reported internally on a quarterly basis.
Other information on insurance risk
More information about (i) risk management objectives and policies for mitigating insurance risk, (ii) terms and conditions of long-term
insurance businesses, (iii) management of insurance risks – life assurance, (iv) guarantees and options – life assurance, and (v) general insurance
risk, can be found at www.oldmutual.com.
(g) Sensitivity analysis – life assurance
Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract provisions recorded,
with impact on profit/(loss) and/or shareholders’ equity. The effect of a change in assumption is mitigated by the offset (partial or full) to the
bonus stabilisation reserve in the case of smoothed bonus products in South Africa.
182
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 The net increase or decrease to insurance contract provisions recorded at 31 December 2012 has been estimated as follows:
assumption
Mortality and morbidity rates – assurance
Mortality rates – annuities
Discontinuance rates
Expenses (maintenance)
%
change
£m
emerging
markets
£m
old mutual
wealth
£m
old mutual
Bermuda
10
(10)
10
10
317
52
(16)
64
2
–
(2)
2
–
–
12
–
Emerging Markets
The changes in insurance contract liabilities shown are calculated using the specified increase or decrease to the rates, with no change in
charges paid by policyholders.
The insurance contract liabilities recorded for the Emerging Market business are also impacted by the valuation discount rate assumed.
Lowering this rate by 1% (with a corresponding reduction in the valuation inflation rate assumption) would result in a net increase to the
insurance contract liabilities, and decrease to profit, of £39 million (2011 restated: £42 million).
The 2011 figure is restated to allow for greater consistency as both the valuation discount rate and the valuation inflation rate are now reduced
by 1% for this sensitivity (in line with expected practice), where historically only the valuation discount rate was reduced (with the inflation rate
unchanged). Consequently, the impact of this sensitivity is reduced as lower future expenses partially offset the increase in liabilities caused by
the lower discount rate. This impact is also calculated with no change in charges paid by policyholders.
It should be noted that where the assets and liabilities of a product are closely matched (eg non-profit annuity business) or where the impact of
a lower valuation discount rate is hedged or partially hedged, the net effect has been shown since the asset movement fully or partially offsets
the liability movement.
Old Mutual Wealth
The changes in insurance contract liabilities shown are calculated independently using the specified increase or decrease to the rates, with no
change in premiums paid by policyholders. The assumption changes have no impact on the linked UK business.
Whole of Life is the main product group affected by the lapse assumption change. This is because the policies have the longest duration and
represent close to 91% of the reserve. The main product groups impacted by the expense, mortality and morbidity sensitivities are Whole of Life
and Accelerated Critical Illness.
In the Old Mutual Wealth business, non-linked liabilities are fairly well matched by gilts so that the net impact of a valuation interest rate change
taking asset and liability movement into account is negligible.
Old Mutual Bermuda
Lapses and partial withdrawals have the largest impact where increased activity reduces the guarantee portion of the business since less
death and living benefit exposure is expected in the future. Mortality plays a much smaller part in Old Mutual Bermuda since all the business
is accumulation/savings-type business. Increased deaths do accelerate payment of guaranteed minimum death benefits but there is a
comparable release of reserve on the maturity guarantee providing an offset (about 82% of the variable annuity business has both death/
living benefits).
The impact of varying expense (maintenance) assumptions is zero for Old Mutual Bermuda as the deferred acquisition cost balance (on which
the sensitivity has an impact) has now been written down to zero.
(h) Sensitivity analysis – general insurance
An increase of 10% in the average cost of claims would require the recognition of an additional loss of £40 million (2011: £36 million) net of
reinsurance. Similarly, an increase of 10% in the ultimate number of claims would result in an additional loss of £40 million (2011: £36 million) net
of reinsurance.
The majority of the Group’s general insurance contracts are classified as ‘short-tailed’, meaning that any claim is settled within a year after
the loss date. This contrasts with the ‘long-tailed’ classes where the claims costs take longer to materialise and settle. The Group’s general
insurance long-tailed business is generally limited to personal accident, third-party motor liability and some engineering classes. In total the
long-tail business comprises less than 5% of an average year’s claim costs.
(i) Reinsurance assets – credit risk
None of the Group’s reinsurance assets are either past due or impaired. Of the reinsurance assets shown in the statement of financial position
all are considered investment grade with the exception of £134 million of unrated exposures (2011: £104 million). Collateral is not taken against
reinsurance assets or deposits held with reinsurers other than in limited circumstances.
183
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e9: Borrowed funds
Senior debt securities and term loans
Floating rate notes
Fixed rate notes
Mortgage backed securities
Subordinated debt securities (net of Group holdings)
Borrowed funds
Other issues treated as equity for accounting purposes
US$750 million cumulative preference securities1
€495 million perpetual preferred callable securities2
£348 million perpetual preferred callable securities2
total: Book value
nominal value of the above
Notes
E9(a)
E9(b)
E9(d)
E9(e)
F11(b)
F10(b)
F10(b)
Group
excluding
nedbank
122
–
122
–
765
887
–
334
348
1,569
1,590
at 31 december 2012
nedbank
1,363
849
514
131
669
2,163
Group
1,485
849
636
131
1,434
3,050
£m
At 31 December 2011
Group
excluding
Nedbank
507
–
507
–
876
Nedbank
1,355
844
511
77
841
1,383
2,273
Group
1,862
844
1,018
77
1,717
3,656
458
338
350
2,529
2,666
1 On 24 September 2012, the Group repaid the US$750 million cumulative preference securities at their nominal value.
2 On 4 December 2012, €5 million of the €500 million perpetual preferred callable securities were acquired and on 5 December 2012, £2 million of the £350 million preferred
callable securities were acquired, both via open market repurchase.
The table below is a maturity analysis of the liability cash flows based on contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year-end exchange rates.
Less than 1 year
Greater than 1 year and less than 5 years
Greater than 5 years
total
Senior notes
(a) Floating rate notes
Group
excluding
nedbank
–
340
500
840
at 31 december 2012
nedbank
522
1,820
314
2,656
Group
522
2,160
814
3,496
£m
At 31 December 2011
Group
excluding
Nedbank
272
898
998
2,168
Nedbank
512
1,936
556
3,004
Group
784
2,834
1,554
5,172
£m
nedbank
R1,690 million unsecured senior debt at JIBAR + 1.50%
R1,044 million unsecured senior debt at JIBAR + 2.20%
R1,750 million unsecured senior debt at inflation linked (3.90% real yield)
R98 million unsecured senior debt at inflation linked (3.80% real yield)
R1,552 million unsecured senior debt at JIBAR + 1.48%
R1,027 million unsecured senior debt at JIBAR + 1.75%
R80 million unsecured senior debt at JIBAR + 2.15%
R988 million unsecured senior debt at JIBAR + 1.05%
R677 million unsecured senior debt at JIBAR + 1.25%
R500 million unsecured senior debt at JIBAR + 1.00%
R1,075 million unsecured senior debt at JIBAR + 0.94%
R1,297 million unsecured senior debt at JIBAR + 1.00%
R405 million unsecured senior debt at JIBAR + 1.30%
R250 million unsecured senior debt at JIBAR + 1.00%
R786 million unsecured senior debt at JIBAR + 1.31%
total floating rate notes
All floating rate notes are non-qualifying for the purposes of regulatory tiers of capital.
184
maturity date
at
31 december
2012
At
31 December
2011
Repaid
September 2015
March 2013
March 2013
April 2013
April 2015
April 2020
March 2014
March 2016
April 2014
October 2014
February 2015
February 2017
August 2015
August 2017
–
76
151
8
114
76
6
71
49
33
79
95
30
18
43
849
119
84
158
9
125
83
6
79
54
40
87
–
–
–
–
844
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 (b) Fixed rate notes
nedbank
R450 million unsecured senior debt at 8.39%
R478 million unsecured senior debt at 9.68%
R3,244 million unsecured senior debt at 10.55%
R1,137 million unsecured senior debt at 9.36%
R1,273 million unsecured senior debt at 11.39%
R660 million unsecured senior debt at zero coupon
Group excluding nedbank
£112 million eurobond at 7.125%¹
US$16 million secured senior debt at 5.23%²
total fixed rate notes
maturity date
at
31 december
2012
At
31 December
2011
£m
March 2014
April 2015
September 2015
March 2016
September 2019
October 2024
October 2016
August 2014
33
35
242
85
102
17
514
112
10
122
636
37
39
265
93
63
14
511
496
11
507
1,018
1 On 1 August 2012 £388m of the £500m senior bond was redeemed via open market tender.
2 On 1 December 2012 $0.5m of the $16.5m senior bond was repaid.
All fixed rate notes are non-qualifying for the purposes of regulatory tiers of capital.
(c) Revolving credit facilities and irrevocable letters of credit
The Group has access to a £1,200 million five-year multi-currency revolving credit facility (agreed in April 2011). At 31 December 2012, none
of this facility was drawn down and there were no irrevocable letters of credit in issue against this facility. At 31 December 2011 the facility was
undrawn but letters of credit were held against the facility in relation to the sale of US Life.
(d) Mortgage-backed securities – Nedbank
nedbank
R1.4 billion (class A2A) at 11.817%
R98 million (class B note) at 12.067%
R76 million (class C note) at 13.317%
R480 (class A1) million at JIBAR + 1.10%
R336 million (class A2) at JIBAR + 1.25%
R900 million (class A3) at JIBAR + 1.54%
R110 (class B) million at JIBAR + 1.90%
total mortgage-backed securities
tier
maturity date
Repaid
Tier 2
Repaid
Tier 2
Tier 2
Repaid
Tier 2 25 October 2039
Tier 2 25 October 2039
Tier 2 25 October 2039
Tier 2 25 October 2039
£m
at
31 december
2012
At
31 December
2011
–
–
–
32
25
66
8
131
67
6
4
–
–
–
–
77
185
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business E: Financial assets and liabilities continued
e9: Borrowed funds continued
Senior notes continued
(e) Subordinated debt securities (net of Group holdings)
nedbank
R300 million (3 month JIBAR + 2.50%)
R1,265 million (JIBAR plus 4.75%)
R650 million (9.03%)
R500 million (3 month JIBAR plus 0.45%)
R500 million (3 month JIBAR plus 0.70%)
R120 million (10.38%)
R1.8 billion (9.84%)
R1.7 billion (8.90%)
R1.0 billion (10.54%)
R2.0 billion (JIBAR plus 0.47%)
R487 million (15.05%)
US$100 million (3 month USD LIBOR)
Less: banking subordinated debt securities held by other
Group companies
Banking subordinated securities
(net of Group holdings)
Group excluding nedbank
€200 million (4.50% to January 2012 and 6 month
EURIBOR plus 0.96 thereafter)1
R3.0 billion (8.92% to October 2015, 3 month JIBAR
plus 1.59% thereafter)
£500 million (8.00%)2
tier
first call date
maturity date
£m
at
31 december
2012
At
31 December
2011
Non-core Tier 1
December 2013
December 2013
Non-core Tier 1 November 2018 November 2018
Repaid
Tier 2
Repaid
Tier 2
Repaid
Tier 2
Repaid
Tier 2
September 2018
Tier 2
February 2019
Tier 2
September 2020
Tier 2
Tier 2
July 2022
Tier 2 November 2018 November 2018
March 2022
Repaid
Repaid
Repaid
Repaid
September 2013
February 2014
September 2015
July 2017
March 2017
Tier 2 Secondary
Lower Tier 2
Repaid
Repaid
Lower Tier 2
Lower Tier 2
October 2015
–
October 2020
June 2021
11
93
–
–
–
–
137
132
81
146
43
62
705
(36)
669
–
218
547
765
12
102
54
40
40
10
153
144
87
161
42
65
910
(69)
841
166
239
471
876
total subordinated debt securities
1,434
1,717
1 The principal and coupon on the bond were swapped at issue equally into sterling and US$ with coupons of 6 month pounds LIBOR plus 0.34% and 6 month USD LIBOR plus
0.31% respectively. During 2011 a €550 million partial repayment, together with settlements of associated currency swaps, was made. On 18 January 2012 the remaining
€200 million was repaid on the first call date.
2 The principal and coupon on the bond were initially swapped into floating rate Swedish kroner, at 3 month STIBOR plus 5.46%. Following the Nordic sale, £375 million of
the coupon is now swapped into floating rate sterling at 6 month pounds LIBOR plus 4.15% and £125 million of principal and coupon is swapped into US dollars at 6 month
USD LIBOR plus 5.49%.
186
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 e10: amounts owed to bank depositors
at 31 december 2012
Current accounts
Savings deposits
Other deposits and loan accounts
Negotiable certificates of deposit
Deposits received under repurchase agreements
amounts owed to bank depositors
At 31 December 2011
Current accounts
Savings deposits
Other deposits and loan accounts
Negotiable certificates of deposit
Deposits received under repurchase agreements
Amounts owed to bank depositors
e11: liquidity
carrying
amount
4,055
1,348
27,309
5,584
1,203
39,499
less than
3 months
4,056
1,348
19,789
1,671
1,203
28,067
more than
3 months
less than
1 year
–
–
3,694
4,397
–
8,091
Between
1 and 5
years
more than
5 years
–
–
3,816
–
–
3,816
–
–
299
–
–
299
Carrying
amount
4,117
1,265
26,850
7,787
1,196
41,215
More than
3 months less
than
1 year
–
–
3,242
4,186
–
7,428
Less than
3 months
4,117
1,265
21,134
2,553
1,196
30,265
Between
1 and 5 years
More than
5 years
–
–
2,370
1,610
–
3,980
–
–
299
1
–
300
£m
total
4,056
1,348
27,598
6,068
1,203
40,273
£m
Total
4,117
1,265
27,045
8,350
1,196
41,973
Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Ultimate responsibility for liquidity
risk management rests with the Board of directors, which has built an appropriate liquidity risk management framework for the management
of the Group’s short-, medium- and long-term funding and liquidity management requirements. The Group manages liquidity by maintaining
adequate reserves, banking facilities and continuously monitoring forecast and actual cash flows and matching the maturity profiles of
financial assets and liabilities. Individual businesses separately maintain and manage their local liquidity requirements according to their
business needs, within the overall liquidity framework established by Old Mutual plc.
The Group continues to meet Group and individual entity capital requirements, and day-to-day liquidity needs through the Group’s available
credit facilities. Given the nature of the Group’s investments and securities, generally speaking, liquid resources are readily available, as the
Group holds large portfolios of highly marketable securities, for example equities, listed bonds, actively traded pooled investments and cash
and cash equivalents. Whilst most of the Group’s policyholder and banking liabilities are generally repayable on demand, the Group’s
expectation is that policyholders and banking depositors will only require funds on an ongoing basis. Cash resources and other liquid assets
are maintained in the event of a need for additional liquidity. Information on the nature of the investments and securities held is given in note E4.
The Group’s existing revolving credit facility of £1.20 billion (2011: £1.20 billion) does not mature until April 2016 (2011: April 2016). Details,
together with information on the Group’s borrowed funds, are given in note E9.
The key information reviewed by the Group’s executive directors and Executive Committee, together with the Group’s Capital Management
Committee, is a detailed management report on the Group’s and holding company’s current and planned capital and liquidity position
together with summary information on the current and planned liquidity positions of the Group’s operating segments. Forecasts are updated
regularly based on new information received, and as part of the Group’s annual business planning cycle. The Group and holding company’s
liquidity and capital position and forecast are presented to the Old Mutual plc Board of directors on a regular basis.
Group operating segments are required, both in terms of their local requirements and in accordance with direction from the holding company,
to establish their own processes for managing their liquidity and capital needs and these are subject to review by their local oversight functions,
with representation from the Group.
Further information on liquidity and holding company cash flow is contained in other sections of this Annual Report.
The Group does not have material liquidity exposure to special purpose entities or investment funds.
The contractual maturities of the Group’s financial liabilities are set out in the appropriate notes to the financial statements.
187
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business F: Other statement of financial position notes
F1: Goodwill and other intangible assets
(a) Goodwill and goodwill impairment
Goodwill arising on the acquisition of a subsidiary undertaking is recognised as an asset at the date that control is achieved (the acquisition
date). Goodwill is measured as the excess of the fair value of the consideration transferred, the amount of any non-controlling interest in the
acquiree and the fair value of the acquirer’s previously-held equity interest in the acquiree (if any) over the net of the acquisition date amounts
of the identifiable assets acquired and the liabilities assumed. If the Group’s interest in the net fair value of the acquiree’s identifiable net assets
exceeds the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s
previously-held equity interest (if any), this excess is recognised immediately in the income statement as a bargain purchase gain.
Goodwill is not amortised, but is reviewed for impairment at least once annually. Any impairment loss is recognised immediately in profit or loss
and is not subsequently reversed.
On loss of control of a subsidiary undertaking, any attributable goodwill is included in the determination of any profit or loss on disposal.
Goodwill is allocated to one or more cash-generating units (CGUs), being the smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets or group of assets. The directors annually test for impairment of each CGU
or group of CGUs containing goodwill and intangible assets with indefinite useful lives, at a level that is no larger than that of the Group’s
identified operating segments for the purposes of segment reporting. An impairment loss is recognised whenever the carrying amount of an
asset or its CGU or group of CGUs exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use.
Impairment losses relating to goodwill are not reversed.
(b) Present value of acquired in-force for insurance and investment contract business
The present value of acquired in-force for insurance and investment contract business is capitalised in the consolidated statement of financial
position as an intangible asset.
The capitalised value is the present value of cash flows anticipated in the future from the relevant book of insurance and investment contract
policies acquired. This is calculated by performing a cash flow projection of the associated life assurance fund and book of in-force policies in
order to estimate future after tax profits attributable to shareholders. The valuation is based on actuarial principles taking into account future
premium income, mortality, disease and surrender probabilities, together with future costs and investment returns on the assets supporting the
fund. These profits are discounted at a rate of return allowing for the risk of uncertainty of the future cash flows. The key assumptions impacting
the valuation are discount rate, future investment returns and the rate at which policies discontinue.
The asset is amortised over the expected profit recognition period on a systematic basis over the anticipated lives of the related contracts.
The amortisation charge is stated net of any unwind in the discount rate used to calculate the asset.
The recoverable amount of the asset is re-calculated at each reporting date and any impairment losses recognised accordingly.
(c) Other intangible assets acquired as part of a business combination
Contractual banking and asset management customer relationships, relationships with distribution channels and similar intangible assets,
acquired as a part of a business combination, are capitalised at their fair value, represented by the estimated net present value of the future
cash flows from the relevant relationships acquired at the date of acquisition.
Brands and similar items acquired as part of a business combination are capitalised at their fair value based on a ‘relief from royalty’ valuation
methodology.
Subsequent to initial recognition such acquired intangible assets are amortised on a straight-line basis over their estimated useful lives as set
out below:
■ Distribution channels
10 years
■ Customer relationships
10 years
■ Brand
15 – 20 years
The estimated life is re-evaluated on a regular basis.
(d) Internally developed software
Internally developed software is amortised over its estimated useful life. Such assets are stated at cost less accumulated amortisation and
impairment losses. Software is recognised in the statement of financial position if, and only if, it is probable that the relevant future economic
benefits attributable to the software will flow to the Group and its cost can be measured reliably.
Costs incurred in the research phase are expensed whereas costs incurred in the development phase are capitalised subject to meeting specific
criteria, set out in the relevant accounting guidance. The main criteria being that future economic benefits can be identified as a result of the
development expenditure. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of the relevant
software, which range between two and five years.
188
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012
£m
Total
2011
7,652
1
94
(319)
(9)
896
1
8
(12)
–
5,637
1
72
(218)
(55)
(313)
580
(6)
5,431
(1,782)
5,637
(412)
(88)
–
20
–
162
(2,279)
(188)
(35)
100
27
(2,687)
(290)
(264)
151
2
–
809
(e) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the
specific asset to which it relates. All other expenditure is expensed as incurred.
For properties reclassified during the year from property, plant and equipment to investment properties, any revaluation gain arising is initially
recognised in the income statement to the extent that impairment losses were previously recognised. Any residual excess is taken to the
revaluation reserve. Revaluation deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual
deficit is accounted for in the income statement.
Investment properties that are reclassified to owner-occupied property are revalued at the date of transfer, with any difference being taken to
the income statement.
(f) Analysis of goodwill and other intangibles
At 31 December
2012
2011
2012
2011
2012
2011
2012
2011
2012
Present value of
acquired in-force
business
development costs
Goodwill
Software
development costs
Other
intangible
assets
Cost
Balance at beginning of the year
Acquisitions through business combinations
Additions
Foreign exchange and other movements
Disposals or retirements
Transfer to non-current assets held
for sale
Balance at end of the year
Amortisation and impairment losses
Balance at beginning of the year
Amortisation charge for the year
Impairment losses
Foreign exchange and other movements
Disposals or retirements
Transfer to non-current assets held
for sale
Accumulated amortisation and
2,882
1
–
(126)
(28)
3,286
–
–
(144)
–
1,476
–
–
(23)
–
–
(260)
–
2,729
2,882
1,453
(665)
–
–
54
–
(455)
–
(264)
31
–
(804)
(84)
–
22
–
2,704
–
–
(44)
–
(1,184)
1,476
(1,297)
(138)
–
28
–
699
–
72
(60)
(27)
–
684
(492)
(53)
–
38
27
766
–
86
(119)
(9)
(25)
699
(523)
(64)
–
72
2
580
–
–
(9)
–
(6)
565
(318)
(51)
(35)
(14)
–
–
23
–
603
–
21
–
impairment losses at end of the year
(611)
(665)
(866)
(804)
(480)
(492)
(418)
(318)
(2,375)
(2,279)
Carrying amount
Balance at beginning of the year
Balance at end of the year
2,217
2,118
2,831
2,217
672
587
1,407
672
207
204
243
207
262
147
484
262
3,358
3,056
4,965
3,358
The present value of acquired in-force business at the year-end of £587 million (2011: £672 million) relates to the Skandia business acquired
during 2006 which is due to be amortised over a further 8 to 13 years.
Of the other intangible assets £130 million (2011: £175 million) relates to distribution channels and £nil (2011: £37 million) brands associated with
the Skandia business. The remaining periods over which these are being amortised are 3 years and 8 years respectively.
The acquisitions through business combinations comprises £1 million (2011: £1 million) in respect of an acquisition made by Nedbank.
(g) Allocation of goodwill to cash-generating units (CGUs)
The carrying amount of goodwill accords with the operating segmentation shown in note B, and primarily relates to the Long-Term Savings
(principally the CGUs of Emerging Markets and Old Mutual Wealth), together with Nedbank and US Asset Management.
Emerging Markets
Wealth Management
Long-Term Savings
Nedbank
US Asset Management
Other
Goodwill, net of impairment losses
£m
At
31 December
2012
At
31 December
2011
86
859
945
355
814
4
90
848
938
374
881
24
2,118
2,217
189
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business F: Other statement of financial position notes continued
F1: Goodwill and other intangible assets continued
(h) Annual impairment testing of goodwill
In accordance with the requirements of IAS 36 ‘Impairment of Assets’, goodwill is tested annually for impairment for each CGU, by comparing
the carrying amount of each CGU to its recoverable amount, being the higher of that CGU’s value-in-use or fair value less costs to sell. An
impairment charge is recognised when the recoverable amount is less than the carrying value.
Long-Term Savings
The CGUs within Long-Term Savings generate revenues through their life assurance and asset management businesses.
The value-in-use calculations for the life assurance operations are determined using the reported embedded value methodology plus a
discounted cash flow calculation for the value of new business. The value of new business represents the present value of future profits from
expected new business. Embedded value represents the shareholders’ interest in the life assurance business and is calculated in accordance
with MCEV principles. The methodology and significant assumptions underlying the determination of embedded value is disclosed in the
supplementary information shown on pages 228 to 236. The differences between the key assumptions applied in the current year and in the
prior year are disclosed on pages 239 to 243.
The cash flows attributable to the value of new business are determined with reference to latest approved three-year business plans. Projections
beyond the plan period are extrapolated using an inflation based growth assumption.
The value-in-use calculations for the asset management operations are similarly determined based on discounted cash flow models derived
from the latest approved three-year business plans. An additional two years projections beyond the plan period are extrapolated using
inflation based growth rates.
The cash flows are discounted at economic profit rates applicable to each individual CGU. The key assumptions used in the value-in-use
calculations for the Emerging Markets, Retail Europe and Old Mutual Wealth CGUs are as follows:
■ The growth rate – The rate used is an inflation based growth assumption, which varies by CGU and is based on external market factors
particular to that CGU. Emerging Markets applied the growth rate of 3.7% (2011: 3.4%) to both its life assurance business and asset
management business in Mexico and Colombia. Old Mutual Wealth, which incorporates the previously separately reported Retail Europe,
applied a weighted average calculation to determine the growth rate of 2.2% (2011: 2.7%)
■ The discount rate – The applied rate used the relevant 10-year government bond rate as a starting point, which was adjusted for an equity
market risk premium and other relevant risk adjustments, which were determined using market valuation models and other observable
references. Rates applied were 13.2% (2011: 13.1%) for Emerging Markets, and 9.3% (2011: 12.7%) for Old Mutual Wealth.
The directors are satisfied that any reasonable change in the assumptions would not cause the recoverable amounts of the Emerging Markets
and Old Mutual Wealth CGUs to fall below their carrying amounts.
Nedbank
The impairment test in respect of the Nedbank CGU has been performed by comparing the CGU’s carrying amount to its value-in-use.
Value-in-use has been determined using a discounted cash flow methodology. The key assumptions used in the value-in-use calculation are the
discount rate and growth rate, which are based on market factors relevant to that CGU. The discount rate applied is approximately 11.2%
(2011: 12.7%). A 5.5% growth rate was applied to extrapolate cash flows for an additional two years beyond the three-year business plan
period. A terminal value, using the same growth rate, is added for the value of cash flows beyond five years.
The directors are satisfied that a reasonable change in assumptions would not cause the recoverable amount of the goodwill to fall below the
carrying amount.
US Asset Management
The impairment test in respect of the USAM’s CGU has been performed by comparing the CGU’s carrying amount to its value-in-use
determined using a discounted cash flow methodology. The key assumptions used in the value-in-use calculations for USAM are as follows:
■ The three year business plan and two further years have growth rate assumptions based on management’s expectation of performance
over this period. A terminal value, using a long-term growth rate of 4.0% (2011: 4.0%) is added for the value of cash flows beyond five years.
The assumed long-term growth rate was determined with reference to nominal historical gross domestic product (GDP) growth in the US,
and the outlook for nominal GDP growth for the US
■ The risk-adjusted discount rate applied was 12.0% (2011: 12.0%).
During 2011, the Group reduced the long-term growth rate for the purposes of the 2011 impairment test. As a result of the change in the growth
rate assumptions and the reduction in near term client cash flows experienced at the time, an impairment charge has been recognised to reflect
the reduction in value-in-use for USAM with a charge of £264 million being recognised during the year-ended 31 December 2011. No such
impairment was raised during 2012.
190
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 (i) Segmental analysis of goodwill and other intangibles
The following table shows a segmental analysis of the carrying amounts of goodwill and other intangible assets, together with amortisation
and impairment charges, by operating segment:
At 31 December
Long-Term Savings
Emerging Markets
Old Mutual Wealth
Nedbank
US Asset Management
Other
Goodwill and
intangible assets
(carrying amount)
2012
2011
1,692
1,860
98
104
1,594
1,756
534
816
14
557
904
37
2012
141
4
137
41
1
5
2011
151
5
146
47
8
84
£m
Amortisation
Impairment
2012
2011
35
–
35
–
–
–
–
–
–
–
264
–
264
3,056
3,358
188
290
35
Following the disposal of Nordic and the Group’s decision to rebrand the Skandia businesses, impairments of £35 million were raised against
the brand assets held by the Skandia businesses. As such, this impairment is not included in the Group continuing operating profit, but is
included the expense of discontinued operations.
F2: Property, plant and equipment
At 31 December
Gross carrying amount
Balance at beginning of the year
Additions
Additions from business combinations
Increase arising from revaluation
Disposals
Foreign exchange and other movements
Transfer to non-current assets held for sale
Accumulated depreciation and impairment losses
Balance at beginning of the year
Depreciation charge for the year
Disposals
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
Carrying amount
Balance at beginning of the year
Balance at end of the year
Land
2011
111
15
7
8
(1)
(25)
–
115
–
–
–
–
–
–
2012
115
9
–
4
(3)
(18)
(1)
106
–
–
–
–
–
–
604
10
–
18
(1)
(68)
(1)
562
(31)
(11)
–
3
–
(39)
Buildings
Plant and
equipment
2012
2011
2012
2011
2012
1,455
120
–
22
(35)
(157)
(2)
1,403
(530)
(101)
28
48
–
(555)
685
23
34
31
(19)
(150)
–
604
(50)
(12)
19
12
–
(31)
635
573
736
101
–
–
(31)
(71)
–
735
(499)
(90)
28
45
–
(516)
237
219
865
148
8
–
(133)
(132)
(20)
736
(596)
(95)
91
91
10
(499)
269
237
115
106
111
115
573
523
925
848
1,015
925
£m
Total
2011
1,661
186
49
39
(153)
(307)
(20)
1,455
(646)
(107)
110
103
10
(530)
The carrying value of property, plant and equipment leased to third parties under operating leases included in the above is £57 million
(2011: £91 million) and comprises land of £9 million (2011: £10 million) and buildings of £48 million (2011: £81 million).
There are no restrictions on property, plant and equipment title as a result of security pledges.
The revaluation of land and buildings relates to Long-Term Savings and to Nedbank. In 2012 Long-Term Savings made revaluation gains of
£3 million on land (2011: £3 million) and £13 million (2011: £6 million) on buildings, while Nedbank made revaluation gains of £nil on land (2011:
£5 million) and £5 million on buildings (2011: £25 million). For Long-Term Savings, land and buildings are valued as at 31 December each year
by internal professional valuers and external valuations are obtained once every three years. External professional valuers are used for
Nedbank. For both businesses the valuation methodology adopted is dependent upon the nature of the property. Income generating assets are
valued using discounted cash flows and vacant land and property are valued according to sales of comparable properties. The carrying value
that would have been recognised had the land and buildings been carried under the cost model would be £32 million (2011: £26 million) and
£233 million (2011: £168 million) respectively for Long-Term Savings and £20 million (2011: £22 million) and £136 million (2011: £150 million) for
Nedbank respectively.
191
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business F: Other statement of financial position notes continued
F3: Investment property
Balance at beginning of the year
Additions
Additions from business combinations
Disposals
Net gain/(loss) from fair value adjustments
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
£m
Year ended
31 December
2012
Year ended
31 December
2011
2,064
55
–
(67)
84
(159)
(31)
1,946
2,040
57
290
(6)
(68)
(249)
–
2,064
The additions of £55 million (2011: £57 million) and the net gain from fair value adjustments of £84 million (2011: £68 million loss) are both
related to Long-Term Savings.
The fair value of investment property (freehold) leased to third parties under operating leases is as follows:
Freehold
Leasehold
Rental income from investment property
Direct operating expense arising from investment property that generated rental income
£m
Year ended
31 December
2012
Year ended
31 December
2011
1,920
26
1,946
172
(18)
154
2,051
13
2,064
184
(19)
165
The carrying amount of investment property is the fair value of the property as determined by a registered independent valuer at least every
three years, and annually by locally qualified staff, having an appropriate recognised professional qualification and recent experience in the
location and category of the property being valued. Fair values are determined having regard to recent market transactions for similar
properties in the same location as the Group’s investment property. The Group’s current lease arrangements, which are entered into on an
arm’s length basis and which are comparable to those for similar properties in the same location, are taken into account.
Of the total investment property of £1,946 million (2011: £2,064 million), £1,603 million (2011: £1,715 million) is attributable to South Africa and
£343 million (2011: £349 million) to Europe.
F4: Deferred acquisition costs
At 31 December
Balance at beginning of the year
New business
Amortisation
Impairment losses charged for the year
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
Insurance contracts Investment contracts
Asset management
2012
2011
2012
101
7
(35)
–
(19)
–
54
212
8
(65)
–
(23)
(31)
101
1,114
190
(187)
–
(10)
–
1,107
2011
1,187
273
(212)
–
(45)
(89)
1,114
2012
136
46
(51)
–
(4)
–
127
2011
135
61
(57)
1
(4)
–
136
2012
1,351
243
(273)
–
(33)
–
1,288
£m
Total
2011
1,534
342
(334)
1
(72)
(120)
1,351
192
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 F5: Trade, other receivables and other assets
Debtors arising from direct insurance operations
Amounts owed by policyholders
Amounts owed by intermediaries
Other
Debtors arising from reinsurance operations
Outstanding settlements
Reinsurance treaties
Other receivables
Accrued interest and rent
Trading securities and spot positions
Prepayments and accrued income
Other assets
At
31 December
2012
£m
At
31 December
2011
94
67
79
240
35
404
545
717
326
275
115
233
86
76
41
203
35
360
754
801
350
530
90
225
Total trade, other receivables and other assets
2,890
3,348
Based on the maturity profile of the above assets, £1,527 million (2011: £1,800 million) is regarded as current and £1,363 million
(2011: £1,548 million) as non-current. All amounts outstanding are short-term in nature. No significant balances are past due or impaired.
F6: Provisions
Year ended 31 December 2012
Balance at beginning of the year
Unused amounts reversed
Charge to income statement
Utilised during the year
Foreign exchange and other movements
Transfer to non-current assets held for sale
Post employment benefits
Balance at end of the year
Year ended 31 December 2011
Balance at beginning of the year
Unused amounts reversed
Charge to income statement
Utilised during the year
Foreign exchange and other movements
Transfer to non-current assets held for sale
Post employment benefits
Balance at end of the year
Client
compensation
Liability for
long service
leave
Restructuring
Provision for
donations
Other
43
–
7
(22)
(6)
–
22
22
47
–
30
(26)
(2)
–
49
49
37
(1)
7
(14)
8
–
37
37
78
–
–
7
(7)
–
78
78
62
(4)
15
(9)
15
–
79
(2)
77
Client
compensation
Liability for
long service
leave
Restructuring
Provision for
donations
Other
39
–
–
(3)
7
–
43
43
57
(1)
33
(30)
(8)
(4)
47
47
34
–
11
(7)
(1)
–
37
37
89
–
–
–
(11)
–
78
78
92
(14)
14
(3)
(18)
(9)
62
2
64
£m
Total
267
(5)
59
(64)
8
–
265
(2)
263
£m
Total
311
(15)
58
(43)
(31)
(13)
267
2
269
193
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business F: Other statement of financial position notes continued
F6: Provisions continued
Provisions in relation to client compensation were £22 million (2011: £43 million), primarily relating to ongoing resolution of claims related to
mis-selling of guarantee contracts in Old Mutual Wealth. £nil (2011: £1 million) is estimated to be payable after more than one year.
The liability for long service leave of £49 million (2011: £47 million) relates to provision for staff payments for long serving employees, all of
which is estimated to be payable in less than one year.
Provisions in relation to restructuring were £37 million (2011: £37 million), primarily in respect of ongoing restructuring of the Old Mutual
Wealth business.
The provision for donations is held by Long-Term Savings in respect of commitments made by the South African business to the future funding
of charitable donations. The funds were made available on the closure of the Group’s unclaimed shares trusts which were set up as part of the
demutualisation in 1999 and closed in 2006. £78 million (2011: £78 million) estimated to be payable after more than one year.
Other provisions include provisions for long-term staff benefits and legal fees.
Where material, provisions are discounted at discount rates specific to the risks inherent in the liability. The timing and final amounts of payments
in respect of some of the provisions, particularly those in respect of litigation claims and similar actions against the Group, are uncertain and
could result in adjustments to the amounts recorded. Of the total provisions recorded above, £127 million (2011: £129 million) is estimated to be
payable after more than one year.
F7: Deferred revenue
Year ended 31 December
Balance at beginning of the year
Fees and commission income deferred
Amortisation
Foreign exchange and other movements
Transfer to non-current assets held for sale
Balance at end of the year
F8: Deferred tax assets and liabilities
Long-term business
Asset management
General insurance
2012
590
67
(64)
(7)
–
586
2011
621
87
(49)
(13)
(56)
590
2012
102
34
(41)
(2)
–
93
2011
2012
2011
98
46
(41)
(1)
–
9
1
–
–
–
102
10
11
–
–
(2)
–
9
2012
701
102
(105)
(9)
–
689
£m
Total
2011
730
133
(90)
(16)
(56)
701
Deferred income taxes are calculated on all temporary differences at the tax rate applicable to the jurisdiction in which the timing differences arise.
(a) Deferred tax assets
The movement on the deferred tax assets account is as follows:
Year ended 31 December 2012
Insurance funds
Tax losses carried forward
Accelerated capital allowances
Other temporary differences
Netted against liabilities
Deferred fee income
At beginning
of the year
Income
statement
(charge)/
credit
Charged
to equity
Acquisition/
disposal of
subsidiaries
Foreign
exchange
and other
movements
£m
At end
of the year
(1)
164
1
185
(176)
166
339
1
(31)
–
39
16
(24)
1
–
–
–
2
(1)
–
1
–
–
–
1
–
–
1
–
(12)
–
153
(154)
11
(2)
–
121
1
380
(315)
153
340
194
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Year ended 31 December 2011
Insurance funds
Tax losses carried forward
Accelerated capital allowances
Other temporary differences
Netted against liabilities
Deferred fee income
At beginning
of the year
Income statement
(charge)/
credit
Charged
to equity
Acquisition/
disposal of
subsidiaries1
(2)
209
2
234
(214)
187
416
–
14
(1)
16
14
–
43
–
–
–
(1)
–
–
(1)
–
(53)
–
(36)
21
(15)
(83)
Foreign
exchange
and other
movements
£m
At end
of the year
1
(6)
–
(28)
3
(6)
(36)
(1)
164
1
185
(176)
166
339
1
Includes transferring Nordic into non-current assets held for sale
Deferred tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable, being
where on the basis of all available evidence it is considered more likely than not that there will be suitable taxable profits against which the
reversal of the deferred tax asset can be deducted. The amounts for which no deferred tax asset has been recognised comprise:
Unrelieved tax losses
Expiring in less than a year
Expiring in the second to fifth years inclusive
Expiring after five years
Accelerated capital allowances
Other timing differences
(b) Deferred tax liabilities
The movement on the deferred tax liabilities account is as follows:
At 31 December 2012
At 31 December 2011
£m
Gross amount
Tax
Gross amount
40
160
1,515
1,715
139
612
2,466
3
11
323
337
33
103
473
49
197
1,784
2,030
126
533
2,689
Tax
3
10
396
409
31
89
529
Year ended 31 December 2012
Accelerated tax depreciation
Deferred acquisition costs
Leasing
PVIF
Other acquired intangibles
Available-for-sale securities
Other temporary differences
Policyholder tax
Netted against assets
At beginning
of the year
Income
statement
(credit)/
charge
Credited
to equity
Acquisition/
disposal of
subsidiaries
Foreign
exchange
and other
movements
£m
At end
of the year
22
170
37
137
37
3
162
112
(176)
504
12
(21)
(23)
(38)
(11)
–
(3)
(54)
16
(122)
–
–
–
–
–
4
2
–
(1)
5
–
–
–
–
(6)
–
–
–
–
(6)
9
9
(13)
19
–
–
155
(6)
(154)
19
43
158
1
118
20
7
316
52
(315)
400
195
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business F: Other statement of financial position notes continued
F8: Deferred tax assets and liabilities continued
(b) Deferred tax liabilities continued
Year ended 31 December 2011
Accelerated tax depreciation
Deferred acquisition costs
Leasing
PVIF
Other acquired intangibles
Available-for-sale securities
Other temporary differences
Policyholder tax
Netted against assets
At beginning
of the year
Income
statement
(credit)/
charge
Credited
to equity
Acquisition/
disposal of
subsidiaries1
Foreign
exchange
and other
movements
29
197
53
197
65
5
381
145
(214)
858
(2)
1
(9)
(27)
(14)
–
(130)
(7)
14
(174)
–
–
–
–
–
(1)
–
–
–
(1)
–
(14)
–
(31)
(13)
1
(68)
–
21
(104)
(5)
(14)
(7)
(2)
(1)
(2)
(21)
(26)
3
(75)
£m
At end
of the year
22
170
37
137
37
3
162
112
(176)
504
1
Includes transferring Nordic into non-current assets held for sale and consolidation of other African businesses
As the Group is able to control the reversal of temporary differences in respect of investments in subsidiaries and branches and it is probable
that these temporary differences will not reverse in the foreseeable future, there is no need to provide for the associated deferred tax liabilities.
The aggregate amount of temporary differences on which further tax might be due if these temporary differences reversed is estimated at
£2.7 billion (2011: £3.0 billion).
F9: Trade, other payables and other liabilities
Amounts payable on direct insurance business
Funds held under reinsurance business ceded
Amounts owed to policyholders
Amounts owed to intermediaries
Other direct insurance operation creditors
Accounts payable on reinsurance business
Accruals and deferred income
Share-based payments – cash-settled scheme liabilities
Short trading securities, spot positions and other
Trade creditors
Outstanding settlements
Total securities sold under agreements to repurchase
Obligations in relation to collateral holdings
Other liabilities
At
31 December
2012
£m
At
31 December
2011
151
562
89
65
867
28
373
56
456
544
524
146
831
964
123
397
76
70
666
38
526
37
931
305
555
89
410
686
4,789
4,243
Included in the amounts shown above are £3,806 million (2011: £3,531 million) that are regarded as current, the remainder as non-current.
196
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 F10: Equity
(a) Share capital
Issued ordinary shares of 113⁄ 7p (2011: 10p)
(b) Perpetual preferred callable securities
£m
At
31 December
2012
At
31 December
2011
559
580
In addition to the Group’s senior and subordinated debt, the Group has issued two separate tranches of perpetual preferred callable securities
with a total carrying value of £682 million at 31 December 2012 (2011: £688 million). In accordance with IFRS accounting standards these
instruments are classified as equity and disclosed within equity shareholders’ funds.
£348 million (2011: £350 million) perpetual preferred callable securities. These are unsecured and subordinated to the claims of senior creditors
and the holders of any priority preference shares. For an initial period to 24 March 2020 interest is payable at a fixed rate of 6.4% per annum
annually in arrears. From 24 March 2020 interest is reset semi-annually at 2.2% per annum above the sterling inter-bank offer rate for six month
sterling deposits, and is payable semi-annually in arrears. Coupon payments may be deferred at the Group’s discretion. The perpetual
preferred callable securities are redeemable at the discretion of the Group at their principal amount from 24 March 2020.
€495 million (2011: €500 million) perpetual preferred callable securities – Step-up Option B Undated subordinated notes issued under a Global
Note Programme. These are unsecured and subordinated to the claims of senior creditors and the holders of any priority preference shares.
For an initial period to 4 November 2015 the notes pay interest at a fixed rate of 5.0% per annum annually in arrears. After this date the interest
is reset semi-annually at 2.63% per annum above six month EURIBOR and is payable semi-annually in arrears. Coupon payments may be
deferred at the Group’s discretion. The perpetual preferred callable securities are redeemable at the discretion of the Group at their principal
amount from 4 November 2015.
F11: Non-controlling interests
(a) Income statement
(i) Ordinary shares
The non-controlling interests share of profit for the financial year has been calculated on the basis of the Group’s effective ownership of the
subsidiaries in which it does not own 100% of the ordinary equity. The principal subsidiaries where a non-controlling interest exists is the
Group’s banking business in South Africa, Nedbank. For the year ended 31 December 2012 the non-controlling interests attributable to
ordinary shares was £264 million (2011: £238 million).
(ii) Preferred securities
R2,000 million non-cumulative preference shares
R773 million non-cumulative preference shares
R355 million non-cumulative preference shares
US$750 million cumulative preferred securities
R363 million non-cumulative preference shares
R92 million non-cumulative preference shares
Non-controlling interests – preferred securities
(iii) Non-controlling interests – adjusted operating profit
At
31 December
2012
£m
At
31 December
2011
12
5
2
27
3
1
50
14
5
2
37
3
1
62
The following table reconciles non-controlling interests’ share of profit for the financial year to non-controlling interests’ share of adjusted
operating profit:
Reconciliation of non-controlling interests’ share of profit for the financial year
The non-controlling interests share is analysed as follows:
Non-controlling interests – ordinary shares
Short-term fluctuations in investment return
Income attributable to Black Economic Empowerment trusts of listed subsidiaries
Fair value gains on Group debt instruments
Income attributable to US Asset Management non-controlling interests
Non-controlling interests share of adjusted operating profit
£m
Year ended
31 December
2012
Year ended
31 December
2011
264
–
25
–
(8)
281
238
1
22
1
(5)
257
197
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business F: Other statement of financial position notes continued
F11: Non-controlling interests continued
(a) Income statement continued
(iii) Non-controlling interests – adjusted operating profit continued
The Group uses revised weighted average effective ownership interests when calculating the non-controllable interest applicable to the
adjusted operating profit of its South Africa banking business. This reflects the legal ownership of this business following the implementation
for Black Economic Empowerment (BEE) schemes in 2005. In accordance with IFRS accounting rules the shares issued for BEE purposes are
deemed to be, in substance, options. Therefore the effective ownership interest of the minorities reflected in arriving at profit after tax in the
consolidated income statement is lower than that applied in arriving at adjusted operating profit after tax. In 2012 the increase in adjusted
operating profit attributable to non-controlling interests as a result of this was £25 million (2011: £22 million).
(b) Statement of financial position
(i) Ordinary shares
Reconciliation of movements in non-controlling interests
Balance at beginning of the year
Non-controlling interests’ share of profit
Non-controlling interests’ share of dividends paid
Net disposal of interests
Foreign exchange and other movements
Balance at end of the year
(ii) Preferred securities
Nedbank
R2,000 million non-cumulative preference shares1
R773 million non-cumulative preference shares2
R355 million non-cumulative preference shares3
R363 million non-cumulative preference shares4
R92 million non-cumulative preference shares5
Group excluding Nedbank
US$750 million cumulative preferred securities6
Unamortised issue costs
Total in issue at 31 December
£m
At
31 December
2012
At
31 December
2011
1,652
264
(119)
20
(125)
1,692
1,763
238
(100)
61
(310)
1,652
£m
At
31 December
2012
At
31 December
2011
140
71
25
29
8
273
–
–
273
140
71
25
29
8
273
458
(13)
718
Preferred securities are held at historic value of consideration received less unamortised issue costs.
1.
200 million R10 preference shares issued by Nedbank Limited (Nedbank), the Group’s banking subsidiary. These shares are non-redeemable and non-cumulative and pay
a cash dividend equivalent to 75% of the prime overdraft interest rate of Nedbank. Preference shareholders are only entitled to vote during periods when a dividend or any
part of it remains unpaid after the due date for payment or when resolutions are proposed that directly affect any rights attaching to the shares or the rights of the holders.
Preference shareholders will be entitled to receive their dividends in priority to any payment of dividends made in respect of any other class of Nedbank’s shares.
2. 77.3 million R10 preference shares issued at R10.68 per share by Nedbank on the same terms as the securities described in (1) above.
3.
35 million R10 preference shares issued on 16 April 2007 at R10.27 per share by Nedbank on the same terms as the securities described in (1) above.
36.3 million R10 preference shares issued by Nedbank in seven instalments between September 2009 and December 2009 on the same terms as the securities described in
(1) above.
4.
5. 9.2 million R10 preference shares issued by Nedbank on 11 March 2010 on the same terms as the securities described in (1) above.
6.
US$750 million guaranteed cumulative perpetual preference securities issued on 19 May 2003 by Old Mutual Capital Funding L.P., a subsidiary of the Group. The securities
are perpetual, but may be redeemed at the discretion of the Group from 22 December 2008. On 24 September 2012, the Group repaid the US$750 million cumulative
preference securities at their nominal value.
198
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 G: Other notes
G1: Post employment benefits
The Group operates a number of pension schemes around the world. These schemes have been designed and are administered in accordance
with local conditions and practices in the countries concerned and include both defined contribution and defined benefit schemes. The assets
of these schemes are held in separate trustee administered funds. Pension costs and contributions relating to defined benefit schemes are
assessed in accordance with the advice of qualified actuaries. Actuarial advice confirms that the current level of contributions payable to
each pension scheme, together with existing assets, are adequate to secure members’ benefits over the remaining service lives of participating
employees. The schemes are reviewed at least on a triennial basis or in accordance with local practice and regulations. In the intervening years
the actuary reviews the continuing appropriateness of the assumptions applied. The actuarial assumptions used to calculate the projected
benefit obligations of the Group’s pension schemes vary according to the economic conditions of the countries in which they operate.
(a) Liability for defined benefit obligations
Year ended 31 December
Changes in projected benefit obligation
Projected benefit obligation at beginning of the year
Benefits earned during the year
Interest cost on benefit obligation
Actuarial loss/(gain)
Benefits paid
Transfer to held for sale
Foreign exchange and other movements
Projected benefit obligation at end of the year
Change in plan assets
Plan assets at fair value at beginning of the year
Actual return on plan assets
Company contributions
Employee contributions
Benefits paid
Transfer to held for sale
Foreign exchange and other movements
Plan assets at fair value at end of the year
Net (asset)/liability recognised in statement of financial position
Funded status of plan
Unrecognised assets
Other amounts recognised in statement of financial position
Unrecognised actuarial (losses)/gains
Net amount recognised in statement of financial position
(b) Expense/(income) recognised in the income statement
Year ended 31 December
Current service costs
Interest cost
Expected return on plan assets
Net actuarial losses recognised in the year
Other post retirement plan costs
Total (included in staff costs)
Pension plans
£m
Other post-retirement
benefit schemes
2012
2011
2012
2011
546
5
34
41
(25)
–
(34)
567
594
67
9
1
(25)
–
(40)
606
(39)
1
–
(24)
(62)
2012
3
25
(33)
1
–
(4)
977
7
39
14
(29)
(388)
(74)
546
1,119
57
13
1
(27)
(463)
(106)
594
(48)
4
–
(10)
(54)
245
7
19
(23)
(8)
–
(19)
221
178
17
(1)
–
(8)
–
(13)
173
48
(17)
–
29
60
270
7
18
14
(7)
–
(56)
246
218
13
(3)
–
(7)
–
(43)
178
68
(22)
1
9
56
Pension plans
2011
4
28
(38)
3
–
(3)
£m
Other post-retirement
benefit schemes
2012
2011
7
19
(14)
(1)
1
12
7
18
(15)
–
–
10
Actuarial assumptions used in calculating the projected benefit obligation are based on mortality estimates relevant to the economic countries
in which they operate, with a specific allowance made for future improvements in mortality which is broadly in line with that adopted for the
92 series of mortality tables prepared by the Continuous Mortality Investigation Bureau of the Institute of Actuaries.
The expected returns on plan assets have been determined on the basis of long-term expectations, the carrying value of the assets and the
market conditions at the reporting date specific to the relevant locations.
199
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business G: Other notes continued
G1: Post employment benefits continued
(b) Expense/(income) recognised in the income statement continued
The effect to the Group’s obligation of a 1% increase and 1% decrease in the assumed health cost trend rates would be an increase of £17 million
and decrease of £14 million (2011: increase of £19 million and decrease of £15 million) respectively.
The detailed actuarial assumptions can be viewed on the Group’s website at www.oldmutual.com
(c) Plan asset allocation
At 31 December
Equity securities
Debt securities
Property
Cash
Annuities and other
Pension plans
£m
Other post-retirement
benefit schemes
2012
31.3
42.7
3.6
1.5
20.9
2011
32.2
42.4
4.1
2.0
19.3
2012
34.0
26.7
4.3
24.1
10.9
2011
35.3
26.3
4.7
23.5
10.2
100.0
100.0
100.0
100.0
Pension and other retirement benefit plan assets include ordinary shares issued by the Company with a fair value of £nil (2011: £nil).
(d) Summary of Group pension plans
At 31 December
Present value of defined benefit obligations
Fair value of plan assets
Surplus
Experience losses arising on defined benefit plan liabilities:
Amount
As a percentage of plan liabilities
Experience gains arising on defined benefit plan assets:
Amount
As a percentage of plan assets
2012
(567)
606
39
(2)
0.4%
(2)
(0.3%)
2011
(546)
594
48
11
(2.0%)
(11)
(1.9%)
2010
(977)
1,119
142
(4)
0.4%
(11)
(1.0%)
2009
(815)
953
138
8
(1.0%)
(8)
(0.8%)
£m
2008
(778)
828
50
2
(0.3%)
(69)
(8.3%)
Total contributions expected to be paid to the Group pension plans for the year ending 31 December 2013 are £9 million (subject to any
reassessments to be completed in the year).
G2: Share-based payments
(a) Reconciliation of movements in options
During the year ended 31 December 2012, the Group had a number of share-based payment arrangements. The movement in the options
outstanding under these arrangements during the year is detailed below:
Options over shares in Old Mutual plc (London Stock Exchange)
Outstanding at beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of the year
Exercisable at 31 December
Year ended 31 December 2012
Year ended 31 December 2011
Number of
options
52,061,951
3,471,696
(212)
(35,910,754)
(1,491,088)
18,131,593
2,030,072
Weighted
average
exercise
price
£0.53
£1.28
£0.90
£0.51
£0.62
£0.72
£0.57
Number of
options
63,745,407
1,742,700
(1,424,629)
(4,444,580)
(7,556,947)
52,061,951
1,722,807
Weighted
average
exercise
price
£0.61
£1.10
£0.47
£0.89
£1.05
£0.53
£0.74
200
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 The options outstanding at 31 December 2012 have an exercise price in the range of £0.35 to £1.31 (2011: £0.35 to £1.53) and a weighted
average remaining contractual life of 0.8 years (2011: 0.7 years). The weighted average share price at date of exercise for options exercised
during the year was £1.54 (2011: £1.28).
Options over shares in Old Mutual plc (Johannesburg Stock Exchange)
Outstanding at beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of the year
Exercisable at 31 December
Year ended 31 December 2012
Year ended 31 December 2011
Number of
options
64,825,574
–
(2,730,167)
(25,955,199)
(2,188,324)
33,951,884
5,714,061
Weighted
average
exercise
price
R11.30
R0.00
R12.69
R8.25
R9.12
R13.67
R8.17
Number of
options
73,997,737
16,000,162
(13,107,564)
(10,093,503)
(1,971,258)
64,825,574
2,277,440
Weighted
average
exercise
price
R11.57
R15.78
R17.51
R12.03
R13.77
R11.41
R11.52
The options outstanding at 31 December 2012 have an exercise price in the range of R6.55 to R15.80 (2011: R1.45 to R19.10) and a weighted
average remaining contractual life of 3.6 years (2011: 4.1 years). The weighted average share price at date of exercise for options exercised
during the year was R19.70 (2011: R14.34).
Options over shares in Nedbank Group Ltd
Outstanding at beginning of the year
Granted during the year
Forfeited during the year
Exercised during the year
Expired during the year
Outstanding at end of the year
Exercisable at 31 December
Year ended 31 December 2012
Year ended 31 December 2011
Number of
options
14,036,842
456,467
(402,035)
(1,097,859)
(151,348)
12,842,067
397,776
Weighted
average
exercise
price
R149.94
R167.15
R119.79
R103.74
R95.35
R156.12
R124.99
Number of
options
25,879,278
921,526
(508,771)
(12,205,562)
(49,629)
14,036,842
865,712
Weighted
average
exercise
price
R126.71
R132.06
R113.07
R101.09
R118.56
R149.94
R98.92
The options outstanding at 31 December 2012 have an exercise price in the range of R112.49 to R282.58 (2011: R108.00 to R282.58) and a
weighted average remaining contractual life of 3.0 years (2011: 3.7 years). The weighted average share price at date of exercise for options
exercised during the year was R175.65 (2011: R129.61).
(b) Measurements and assumptions
The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted.
The estimate of the fair value of share options granted is measured using a Black-Scholes option pricing model.
Share options are granted under a service and non-market based performance condition. Such conditions are not taken into account in the
grant date fair value measurement of the share options granted. There are no market conditions associated with the share option grants.
The grant date for the UK and South African Share Option and Deferred Delivery Plan annual awards is deemed to be 1 January in the year
prior to the date of issue. As such the Group is required to estimate, at the reporting date, the number and fair value of the options that will be
granted in the following year. The fair value of awards expected to be granted in 2013 which will have an IFRS 2 grant date of 1 January 2012,
is shown separately below. The grant date for all other awards is the award issue date.
(c) Share-based payment arrangements relating to US Asset Management
During the year ended 31 December 2012, US Asset Management had the following share based payment arrangements:
Acadian Asset Management (AAM)
Class B equity interests in AAM acquired by employees during 2007 entitled the participating employees to 28.57% of the earnings of AAM
in excess of $120 million, and to a liquidation preference proportionate to their shareholding. In consideration for the equity acquired, the
participating employees agreed to forego a portion of existing long-term incentive payments owed. The difference between the carrying
amount of this consideration and the fair value of the interest acquired was treated as share-based compensation expense in 2007. Fair value
was determined based on the discounted projected future cash flows of AAM.
During 2011, the AAM plan was modified such that the threshold above which key employees participate in earnings was reduced to
$75 million, and a feature was added such that participating employees may sell their equity back to Old Mutual at a fixed multiple of
prior year earnings, subject to certain restrictions. Participants are required to remain employed until 31 March 2013 to benefit from these
amendments. The difference in fair value between the modified AAM plan and the original AAM plan was $21 million at the time of modification,
and the vested portion of $11 million is recognised as compensation expense during 2012. As the AAM plan conforms to the form and
operation of the ‘OMAM Affiliate Equity Plans’ described below, new purchases and grants are classified to that category of arrangement from
2011 onwards.
201
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business G: Other notes continued
G2: Share-based payments continued
(c) Share-based payment arrangements relating to US Asset Management continued
IPO Incentive Plan
During 2011, a stock-based compensation plan was implemented for certain key employees of US Asset Management in connection with the
stated intention of exploring a potential initial public offering (IPO) of the business. The plan is designed to reward participants for achievement
of strategic objectives and metrics and value creation over the period leading up to an initial public offering, should one proceed. The awards
consist of a mix of cash, payable at completion of an IPO, and restricted shares in the newly-listed US entity, which would be granted upon
completion of an IPO and vest rateably over 3 years from that date. Should an IPO not proceed during the maximum term of the plan, the
awards will be paid out in cash. The value and quantity of the cash and share portions of the awards will vary until an IPO is completed or the
plan is terminated, depending on the achievement of performance objectives, financial targets and potential IPO proceeds. Accordingly, the
awards are currently accounted for as a share-based payment liability, recognized over the vesting period and revalued at each period end
for projected results of the performance conditions, with fair value-measured using a monte-carlo simulation. The expense recognised during
2012 in relation to this plan was $2.3 million (2011: $1.3 million).
OMAM Affiliate Equity Plans
Equity granted during the year to employees of firms participating in the OMAM Affiliate Equity Plan vests 3 to 5 years from the date of grant,
conditional upon continued employment over this period. Equity purchased vested immediately. Fair value was determined based on a multiple
of prior year earnings. Under the terms of the arrangements, participating employees may sell their equity back to Old Mutual (which acts
as a buyer of last resort) at a fixed multiple of prior year earnings, subject to certain restrictions. Accordingly, the schemes are accounted for
as cash-settled share-based payments, despite the fact the initial purchase and/or grants of equity are settled in equity instruments.
The following summarises the fair value of instruments purchased from and granted by US Asset Management during the year:
Instruments granted and purchased during the year
Percentage of affiliate equity
Fair value of instruments1
1 Represents fair value in excess of consideration granted for affiliate share purchases.
Affiliate share
purchases
Affiliate share
grants
Affiliate shares
forfeited/
bought back
Total
non-controlling
interest in affiliate
2012
2011
2012
2011
0.01%
0.07%
–
–
1.97%
3.88%
$11.5m
$31m
(0.23)%
(0.11)%
–
–
1.75%
3.84%
$11.5m
$31m
US Asset Management annual bonus awards
The OMAM Affiliate Equity Plans are incorporated into annual bonus awards of employees at participating firms, which are to be settled
partly in cash, and partly in equity. The level of bonus is contingent upon current year financial and individual performance, therefore the
vesting period for bonus equity to be granted during 2013 in respect of the 2012 financial year has been determined to commence from
1 January 2012.
It is anticipated that instruments with a fair value of US$11.1 million (2011: US$15.8 million and 2010: US$7.9 million) will be granted during 2013
to firms participating in the OMAM Affiliate Equity Plan based on 2012 financial performance.
(d) Restricted share grants
The following summarises the fair value of restricted shares granted by the Group during the year:
Instruments granted and purchased during the year
Shares in Old Mutual plc (London Stock Exchange)
Shares in Old Mutual plc (Johannesburg Stock Exchange)
Shares in Nedbank Ltd
Number granted
2012 12,351,453
13,429,616
2011
2012 22,703,982
24,108,524
2011
2012
2011
4,467,742
4,806,015
Weighted
average
fair value
£1.57
£1.44
R19.35
R15.16
R158.11
R134.64
The share price at measurement date was used to determine the fair value of the restricted shares. Expected dividends were not incorporated
into the measurement of fair value where the holder of the restricted share is entitled to dividends throughout the vesting period.
(e) Annual bonus awards
The UK and South Africa Share Option and Deferred Delivery Plans give rise to annual bonus awards. The level of annual bonus awards is
contingent upon the satisfactory completion of individual and company performance targets, measured over the financial year prior to the
date the employees receive the award. The accounting grant date for the South African and UK annual bonus plans (other than the new joiner
and newly qualified grants) has therefore been determined as 1 January in the year prior to the date of issue of the grants.
202
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 The Group anticipates awards under the South African scheme of nil options (2011: nil) and 9,337,461 restricted shares (2011: 15,983,524).
The options have been valued using the Black-Scholes option pricing model, using an at the money option assumption. The restricted shares
have been valued using a share price of R24.49 (2011: R17.04).
The Group estimate of the total fair value of the annual bonus expected to be paid in the form of options and restricted shares under the UK
Share Option and Deferred Delivery Plan is outlined below. The fair value is determined by making an estimate of the level of bonus to be paid
out following the attainment of personal and company performance conditions.
Old Mutual plc performance share plans – restricted shares
(f) Financial impact
Expense arising from equity settled share and share option plans
Expense arising from cash settled share and share option plans
Closing balance of liability for cash settled share awards
G3: Related parties
Year ended 31 December 2012
Year ended 31 December 2011
Total fair
value, £m
Vesting
period
Total fair
value, £m
Vesting
period
15
4.2 years
12
4.2 years
£m
Year ended
31 December
2012
Year ended
31 December
2011
14
64
78
56
24
37
61
37
The Group provides certain pension fund, insurance, banking and financial services to related parties. These are conducted on an arm’s length
basis and are not material to the Group’s results.
(a) Transactions with key management personnel, remuneration and other compensation
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the
Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. Details of the compensation paid to the
Board of directors as well as their shareholdings in the Company are disclosed in the Remuneration Report on page 99 to 116.
(b) Key management personnel remuneration and other compensation
Directors’ fees
Remuneration
Cash remuneration
Short-term employee benefits
Long-term employee benefits
Share-based payments
Share options
Outstanding at beginning of the year
New appointments
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at end of the year
Year ended 31 December 2012
Year ended 31 December 2011
Number of
personnel
Value £000s
Number of
personnel
Value £000s
10
18
18
18
13
1,418
24,140
5,837
6,779
781
10,743
25,558
12
17
17
16
13
1,638
25,176
5,969
8,751
1,308
9,148
26,814
Year ended 31 December 2012
Year ended 31 December 2011
Number of
personnel
Number of
options/shares
‘000s
Number of
personnel
Number of
options/shares
‘000s
11
1
4
11,482
697
–
(8,340)
(2,095)
1,744
13
1
11
14,499
274
193
(2,079)
(1,405)
11,482
203
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business G: Other notes continued
G3: Related parties continued
(b) Key management personnel remuneration and other compensation continued
Restricted shares
Outstanding at beginning of the year
New appointments
Granted during the year
Exercised during the year
Vested during the year
Effect of share consolidation
Outstanding at end of the year
(c) Key management personnel transactions
Year ended 31 December 2012
Year ended 31 December 2011
Number of
personnel
Number of
options/shares
‘000s
Number of
personnel
Number of
options/shares
‘000s
14
2
14
4
21,652
2,041
5,898
(1,398)
(4,617)
(1,248)
14
22,328
14
19,142
1,580
7,111
(2,911)
(3,270)
–
21,652
Key management personnel and members of their close family have undertaken transactions with Old Mutual plc and its subsidiaries, jointly
controlled entities and associated undertakings in the normal course of business, details of which are given below. For current accounts positive
values indicate assets of the individual whilst for credit cards and mortgages positive values indicate liabilities of the individual.
Current accounts
Balance at beginning of the year
Net movement during the year
Balance at end of the year
Credit cards
Balance at beginning of the year
Net movement during the year
Balance at end of the year
Mortgages
Balance at beginning of the year
Net movement during the year
Interest charged
Less repayments
Foreign exchange movements
Balance at end of the year
General insurance contracts
Total premium paid during the year
Claims paid during the year
Life insurance products
Total sum assured/value of investment at end of the year
Pensions, termination benefits paid
Termination benefits paid
Value of pension plans as at end of the year
Year ended 31 December 2012
Year ended 31 December 2011
Number of
personnel
Value
£000s
Number of
personnel
5
4
5
4
4
2
3
1
324
880
1,204
26
(8)
18
621
44
31
(522)
45
219
13
3
8
5
5
5
5
4
3
1
Value
£000s
672
(348)
324
29
(3)
26
1,791
(627)
49
(778)
186
621
15
1
12
18,524
4
10
2,736
4,379
10
3
10
16,029
1,625
5,700
Various members of key management personnel hold, and/or have at various times during the year held, investments managed by asset
management businesses of the Group. These include unit trusts, mutual funds and hedge funds. None of the amounts concerned are material in
the context of the funds managed by the Group business concerned, and all of the investments have been made by the individuals concerned
either on terms which are the same as those available to external clients generally or, where that is not the case, on the same preferential terms
as were available to employees of the business generally.
204
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 G4: Principal subsidiaries and Group enterprises
The following table lists the principal Group undertakings whose results are included in the consolidated financial statements. All shares held
are ordinary shares and, except for OM Group (UK) Ltd, are held indirectly by the Company.
Name
Old Mutual (South Africa) Ltd
Old Mutual Africa Holdings (Pty) Ltd
Old Mutual Life Assurance Company (South Africa) Ltd
Old Mutual Investment Group (South Africa) (Pty) Ltd
Nedbank Group Ltd
Nedbank Ltd
Mutual & Federal Insurance Company Ltd
Old Mutual Life Assurance Company (Namibia) Ltd
Old Mutual (US) Holdings, Inc
Old Mutual (Bermuda) Ltd
Acadian Asset Management LLC1
Barrow, Hanley, Mewhinney & Strauss LLC
Rogge Global Partners plc
OM Group (UK) Ltd
Old Mutual Wealth Management Limited
Skandia Europe and Latin America (Holdings) Ltd
Skandia Life Assurance Company Ltd
Old Mutual (Netherlands) B.V.
Nature of business
Holding company
Holding company
Life assurance
Asset management
Banking
Banking
General insurance
Life assurance
Holding company
Life assurance
Asset management
Asset management
Asset management
Holding company
Holding Co
Holding company
Life assurance
Holding Company
Percentage
holding
100
100
100
100
58
58
100
100
100
100
100
100
81
100
100
100
100
100
Country of incorporation
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Namibia
Delaware, USA
Bermuda
Delaware, USA
Delaware, USA
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Netherlands
1 The Group holds 100% Class A shares and 71.43% Class B shares in Acadian Asset Management. The remaining 28.57% Class B shares are held by the employees as
described in note G2(c).
A complete list of subsidiaries is filed with the UK Registrar of Companies with the annual return. All the above companies have a year-end of
31 December.
G5: Investments in associated undertakings and joint ventures
(a) Investments in associated undertakings and joint ventures
The Group’s investments in associated undertakings and joint ventures accounted for under the equity method are as follows:
At 31 December 2012
Billion Property Developments (Pty) Ltd
Odyssey Developments (Pty) Ltd
Old Mutual Finance (Pty) Ltd
Curo Fund Services
African Infrastructure Investment Managers (Pty) Ltd
Kotak Mahindra Old Mutual Life Insurance Ltd
Old Mutual-Guodian Life Insurance Company Ltd
All other associated undertakings
At 31 December 2011
Visigro Investments (Pty) Ltd
Odyssey Developments (Pty) Ltd
Old Mutual Finance (Pty) Ltd
Kotak Mahindra Old Mutual Life Insurance Ltd
Old Mutual-Guodian Life Insurance Company Ltd
All other associated undertakings
Country of operation
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
Republic of South Africa
India
China
Country of operation
Republic of South Africa
Republic of South Africa
Republic of South Africa
India
China
Percentage
interest
held
Carrying
value
£m
Group
share of
profit/(loss)
20%
49%
50%
50%
50%
26%
50%
10
7
14
8
6
26
18
48
137
–
–
8
3
6
5
(5)
7
24
£m
Percentage
interest
held
Carrying
value
Group
share of
profit/(loss)
30%
49%
50%
26%
50%
6
8
6
26
12
53
111
–
–
7
6
(4)
1
10
205
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business G: Other notes continued
G5: Investments in associated undertakings and joint ventures continued
(b) Aggregate financial information of investments in associated undertakings and joint ventures
The aggregate financial information for all investments in associated undertakings and joint ventures is as follows:
Total assets
Total liabilities
Total revenues
Net profit after tax
(c) Aggregate Group investment in associated undertakings and joint ventures
The aggregate amounts for the Group’s investment in associated undertakings and joint ventures are as follows:
Balance at beginning of the year
Net additions/(disposals) of investment in associated undertakings and joint ventures
Share of profit after tax
Dividends paid
Foreign exchange and other movements
Balance at end of the year
Year ended
31 December
2012
£m
Year ended
31 December
2011
2,083
(1,872)
463
24
2,172
1,947
607
10
Year ended
31 December
2012
£m
Year ended
31 December
2011
111
27
24
(2)
(23)
137
162
(7)
10
(4)
(50)
111
The Group has no significant investments in which it owns less than 20% of the ordinary share capital that it accounts for using the equity method.
(d) Contingent liabilities
At 31 December 2012 and 31 December 2011, the Group had no contingent liabilities relating to investments in associated undertakings and
joint ventures.
(e) Other Group holdings
The above does not include companies whereby the Group has a holding of more than 20%, but does not have significant influence over these
companies by virtue of the Group not having any direct involvement in decision making or the other owners possessing veto rights.
G6: Contingent liabilities
Guarantees and assets pledged as collateral security
Irrevocable letters of credit
Secured lending
Other contingent liabilities
At
31 December
2012
£m
At
31 December
2011
2,521
177
492
57
2,251
193
515
72
The Group, through its South African banking business, has pledged debt securities amounting to £1,203 million (2011: £1,196 million) as
collateral for deposits received under re-purchase agreements. These amounts represent assets that have been transferred but do not qualify
for derecognition under IAS 39. These transactions are entered into under terms and conditions that are standard industry practice to securities
borrowing and lending activities.
Contingent liabilities – tax
The Revenue authorities in the principal jurisdictions in which the Group operates (South Africa and the United Kingdom) routinely review
historic transactions undertaken and tax law interpretations made by the Group. The financial statements accordingly include provisions that
reflect the Group’s assessment of liabilities which might reasonably be expected to materialise.
206
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Nedbank structured financing
Historically the Group’s South African banking business entered into structured-finance transactions with third parties using their tax bases. In
the majority of these transactions, the underlying third-party has contractually agreed to accept the risk of any tax being imposed by the South
African Revenue Service (SARS), although the obligation to pay rested in the first instance with the Group. It would only be in limited cases, for
example, where the credit quality of a client became doubtful, or where the client specifically contracted out of the repricing of additional taxes,
that the recovery from a client could be less than the liability arising on assessment, in which case provisions would be raised.
Nedbank litigation
There are a number of legal or potential claims against Nedbank and its subsidiary companies, the outcome of which cannot at present be
foreseen. The largest of these potential actions is a claim in the High Court for R1.3 billion against Nedbank by certain shareholders in Pinnacle
Point Group Limited, alleging that Nedbank had a legal duty of care to them arising from a share swap transaction. During 2011 further
actions were instituted against Nedbank by other stakeholders relating to this same issue. In early 2013 one of the claims by one of the
shareholders, Property Promotions and Management (Pty) Ltd, for an amount of R147 million was dismissed by the North Gauteng High Court
in Pretoria. Nedbank and its legal advisers remain of the opinion that the remaining claims are ambitious, and that the remaining claimants will
have great difficulty succeeding.
Nedbank Securitisations
The Group through Nedbank uses securitisation primarily as a funding diversification tool and to add flexibility in mitigating structural liquidity
risk. Nedbank currently has two active traditional securitisation transactions:
■ Synthesis Funding Limited (Synthesis), an asset-backed commercial paper (ABCP) programme launched in 2004; and
■ GreenHouse Funding (Pty) Limited, Series 1 (GreenHouse), a residential mortgage-backed securitisation programme launched in
December 2007 restructured in November 2012.
Synthesis primarily invests in long-term rated bonds and offers capital market funding to South African corporates. These assets are funded
through the issuance of short-dated investment-grade commercial paper to institutional investors. All the commercial paper issued by Synthesis
is assigned the highest short-term RSA local-currency credit rating by Fitch, and is listed on JSE Limited.
Within GreenHouse Series 1, R2.0 billion of home loans originated by Nedbank, was securitised in 2007. The notes issued to finance the
purchase of the home loan portfolio were assigned credit ratings by both Fitch and Moody’s and listed on JSE Limited. During 2010 Fitch
placed the GreenHouse notes on rating watch negative as a result of changes in its rating criteria for SA RMBS transactions. On 22 May 2012
Fitch affirmed the rating of the notes, with a stable outlook, and withdrew the rating of the subordinated loan.
GreenHouse was restructured and refinanced on 19 November 2012 as a static amortising structure. The proceeds from the refinance of this
transaction, through the issuance of new notes and subordinated loans, was utilised to repay the R1.3 billion existing notes and subordinated
loans upon their scheduled maturity, and to acquire additional home loans of approximately R795 million. The newly issued senior notes, which
have been rated by Fitch and listed on the JSE Limited, were placed with third-party investors and the junior notes and subordinated loans
retained by the Group. The home loans transferred to GreenHouse have continued to be recognised as financial assets. GreenHouse will direct
all capital repayments received on the home loan portfolio to the noteholders.
The following table shows the carrying amount of securitised assets, stated at the amount of the Group’s continuing involvement where
appropriate, together with the associated liabilities, for each category of asset in the statement of financial position:1
Carrying amount of assets
Associated liabilities
At 31 December
Loans and advances to customers
Residential mortgage loans2
Other financial assets
Corporate and bank paper
Other securities
Commercial paper
Total
2012
96
155
189
–
440
2011
116
116
199
–
431
2012
161
–
–
345
506
This table presents the gross balances within the securitisation schemes and does not reflect any eliminations of intercompany and cash
balances held by the various securitisation vehicles.
1 The value of any derivative instruments taken out to hedge any financial asset or liability is adjusted against such instrument in this disclosure.
2
The balance at 31 December 2012 represents residential mortgages ceded to GreenHouse at 31 December 2012. It excludes funds of approximately £58 million held
in a warehouse facility available for transfer once the remaining acquired residential mortgages have been ceded.
2011
132
–
–
320
452
207
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business G: Other notes continued
G7: Commitments
Capital commitments
The Group’s capital commitments are detailed in the table below. The Group’s management is confident that future net revenues and funding
will be sufficient to cover these commitments.
Investment property
Property, plant and equipment
At
31 December
2012
63
50
£m
At
31 December
2011
85
70
Commitments to extend credit to customers
The following table presents the contractual amounts of the Group’s financial instruments not included in the statement of financial position that
commit it to extend credit to customers.
Original term to maturity of one year or less
Original term to maturity of more than one year
Other commitments, note issuance facilities and revolving underwriting facilities
At
31 December
2012
2,199
1,569
1,898
£m
At
31 December
2011
2,057
1,396
2,093
Assets are pledged as collateral under repurchase agreements with other banks and for security deposits relating to local futures, options and
stock exchange memberships. Mandatory reserve deposits are also held with local Central Banks in accordance with statutory requirements.
These deposits are not available to finance the Group’s day-to-day operations.
Commitments under the Group’s operating lease arrangements are described in note G8.
G8: Operating lease arrangements
(a) The Group as lessee
At 31 December 2012
£m
At 31 December 2011
Outstanding commitments under non-
cancellable operating leases, fall due as follows:
Banking
Non-
banking
64
213
196
473
21
39
35
95
Within one year
In the second to fifth years inclusive
After five years
(b) The Group as lessor
Assets subject to operating leases
Land
Buildings
Investment property
Total
85
252
231
568
Banking
67
173
210
450
Non-
banking
15
52
39
106
Total
82
225
249
556
£m
At
31 December
2012
At
31 December
2011
9
48
1,946
2,003
10
81
2,064
2,155
208
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 Future minimum lease payments of contracts with tenants
Within one year
In the second to fifth years inclusive
After five years
At
31 December
2012
£m
At
31 December
2011
58
167
52
277
61
159
90
310
G9: Fiduciary activities
The Group provides custody, trustee, corporate administration, and investment management and advisory services to third parties that involve
the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in
a fiduciary capacity are not included in these financial statements. Some of these arrangements involve the Group accepting targets for
benchmark levels of returns for the assets under the Group’s care. These services give rise to the risk that the Group will be accused of
misadministration or under-performance.
G10: Events after the reporting date
In January 2013, the Group completed the acquisition of a majority stake ownership in AIVA Business Platforms (AIVA), a Uruguay-based
strategic distribution business. The Group will consolidate the financial results of AIVA in its 2013 consolidated financial statements.
209
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business H: Discontinued operations and disposal groups held for sale
H1: Discontinued operations
The results of the Group’s Swedish, Danish and Norwegian life businesses, collectively Nordic, and United States life business, US Life,
are shown as discontinued operations in these financial statements. The disposal of Nordic was completed on 21 March 2012 following
shareholder and regulatory approval, and has been reported up until that date. The disposal of US Life was completed on 7 April 2011
following regulatory approval, and has been reported up until that date. Further detail is provided in note A2.
(a) Income statement from discontinued operations
Year ended 31 December 2012
Year ended 31 December 2011
£m
Nordic
US Life
Revenue
Expenses
Profit before tax from discontinued operations
Profit/(loss) on disposal
Realised available-for-sale investment gains and
exchange differences on disposal
Profit before tax
Income tax (charge)/credit
Profit from discontinued operations after tax
842
(866)
(24)
239
350
565
(1)
564
(b) Statement of comprehensive income from discontinued operations
–
–
–
–
–
–
–
–
Total
842
(866)
(24)
239
350
565
(1)
564
Nordic
US Life
(421)
541
120
–
–
120
(52)
68
342
(330)
12
(29)
133
116
14
130
Total
(79)
211
132
(29)
133
236
(38)
198
£m
Year ended 31 December 2012
Year ended 31 December 2011
Profit from discontinued operations after tax
Other comprehensive income for the
financial period
Fair value gains/(losses)
Available-for-sale investments
Fair value gains
Recycled to the income statement
Realised on disposal
Exchange differences realised on disposal
Shadow accounting
Currency translation differences/exchange differences
on translating foreign operations
Other movements
Aggregate tax on transfers from equity
Total other comprehensive loss from
discontinued operations
Total comprehensive income for the financial
period from discontinued operations
Attributable to
Equity holders of the parent
Nordic
564
US Life
–
Total
564
Nordic
68
US Life
130
4
–
–
(350)
–
2
(3)
(1)
(348)
216
216
–
–
–
–
–
–
–
–
–
–
–
4
–
–
(350)
–
2
(3)
(1)
(348)
216
216
3
–
–
–
–
(43)
10
(1)
(31)
37
37
48
(5)
(157)
24
(43)
–
–
3
(130)
–
–
Total
198
51
(5)
(157)
24
(43)
(43)
10
2
(161)
37
37
Profit before tax from the Nordic discontinued operation includes trading revenues and expenses up to the completion date, 21 March 2012.
Also included in the expenses is an impairment of brand assets of £35 million.
Profit on disposal of the Nordic business is calculated after taking into account the net sales proceeds of £2,095 million, net assets of the
business of £1,744 million and net investment currency hedge losses of £112 million, previously included in equity translation reserves.
Cumulative foreign exchange translation gains of £350 million, previously included in equity translation reserves, are realised on the disposal
of the Nordic business.
(c) Net cash flows from discontinued operations
Operating activities
Investing activities
Net cash flows from discontinuing operations
Year ended 31 December 2012
Year ended 31 December 2011
Nordic
US Life
(8)
(121)
(129)
–
–
–
Total
(8)
(121)
(129)
Nordic
1,609
(1,411)
198
US Life
2
146
148
Total
1,611
(1,265)
346
£m
210
Old Mutual plcAnnual Report and Accounts 2012Group financial statements notes to tHe consoliDateD financial statementsFor the year ended 31 December 2012 H2: Disposal groups held for sale
At 31 December 2011 the assets and liabilities of the Group’s Nordic business were shown as held for sale in the financial statements, being
£20,960 million and £19,289 million respectively. At 31 December 2011 the assets and liabilities of the Group’s Finnish branch were also shown
as held for sale in the financial statements, being £1,156 million and £1,119 million respectively. The disposals of both of these businesses were
completed during the year and therefore no assets or liabilities are shown as held for sale at 31 December 2012.
In addition to the disposal groups held for sale, the Group also had additional non-current assets for sale of £42 million (2011: £22 million) and
non-current liabilities of £3 million (2011: £9 million).
H3: Contingent liabilities in respect of the disposal of US Life
Following its disposal in April 2011 of US Life to the Harbinger group (Harbinger), the Group has retained certain residual commitments and
contingent liabilities relating to that business. These arise from sale warranties and indemnities that are typical in transactions of this nature,
including in respect of certain litigation (including class actions) and regulatory enforcement actions arising from events that occurred before
completion of the sale. The residual commitments are in effect for varying periods of time.
The sale agreement contemplated that Harbinger would establish certain internal reinsurance arrangements after completion, which were
subject to regulatory approval. If such regulatory approval was not forthcoming, there was potential for a reduction in the purchase price of
US Life of up to a maximum of US$50 million. In July 2012, Harbinger filed a lawsuit against the Group, claiming payment of a purchase price
adjustment of US$50 million. The Group has filed its defence and is vigorously defending this claim. In view of the ongoing uncertainty and the
Group’s current assessment of this claim, the Group has not raised a provision against this exposure.
211
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Financial statements oF the company
company statement oF
Financial position
At 31 December 2012
assets
Investments in Group subsidiaries
Non-current assets held for sale
Investments and securities
Investments in associated undertakings and joint ventures
Trade, other receivables and other assets
Derivative financial instruments – assets
Cash and cash equivalents
total assets
liabilities
Borrowed funds
Provisions
Trade, other payables and other liabilities
Derivative financial instruments – liabilities
total liabilities
net assets
equity
Equity attributable to equity holders of the parent
total equity
at
31 December
2012
At
31 December
2011
Notes
£m
8
13
10
9
4
2
3
6
5
2
8,151
128
167
26
2,235
96
313
11,116
659
9
4,376
8
5,052
6,064
6,064
6,064
7,805
2,084
–
26
2,254
86
441
12,696
1,140
12
5,384
3
6,539
6,157
6,157
6,157
The Company’s financial statements on pages 212 to 220 were approved by the Board of directors on 1 March 2013.
Julian Roberts
Group Chief Executive
philip Broadley
Group Finance Director
212
Old Mutual plcAnnual Report and Accounts 2012 Financial statements oF the company
company statement oF
cash Flows
For the year ended 31 December 2012
profit before tax
Fair value on derivatives and borrowed funds
Foreign exchange on assets and liabilities
non-cash movements in profit before tax
Other operating assets and liabilities
changes in working capital
net cash inflow from operating activities
Acquisition of interests in subsidiaries, associates and strategic investments
Disposal of interests in subsidiaries, associates and joint ventures
Other investing cash flows
net cash inflow from investing activities
External interest received
External interest paid
Inter-company interest paid
Dividends paid to:
Ordinary shareholders of the Company
Equity minority interests and preferred shares
Net proceeds from issue of ordinary shares
Net purchase of treasury shares
Subordinated and other debt repaid
Loan financing received from Group companies
net cash outflow from financing activities
net (decrease)/increase in cash and cash equivalents
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at beginning of the period
cash and cash equivalents at end of the year
year ended
31 December
2012
Notes
£m
Year ended
31 December
2011
454
149
(11)
138
(236)
(236)
356
(515)
2,084
(162)
1,407
43
(89)
(28)
(554)
(42)
33
(19)
(640)
(595)
(1,891)
(128)
–
441
313
804
(62)
44
(18)
(123)
(123)
663
(12)
22
2
12
81
(144)
(37)
(58)
(44)
10
(17)
(339)
(125)
(673)
2
1
438
441
213
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business Financial statements oF the company
company statement oF
changes in equity
For the year ended 31 December 2012
year ended 31 December 2012
Notes
attributable to equity holders of the
company at beginning of the year
profit for the year
total comprehensive income for the year
Dividends for the year
Merger reserve realised
Net purchase of treasury shares
Share consolidation
Other movements in share capital and share-based
payment reserve
Fair value of equity-settled share options
attributable to equity holders of the
company at end of the year
millions
number of
shares
issued and
fully paid
share
capital
share
premium
other
reserves
Retained
earnings1
perpetual
preferred
callable
securities
£m
total
5,801
580
805
2,591
1,493
688
6,157
–
–
–
–
(239)
(697)
27
–
–
–
–
–
(24)
–
3
–
–
–
–
–
–
–
30
–
–
–
–
(815)
24
–
–
15
480
480
(596)
815
(19)
–
–
–
42
42
(42)
–
(6)
–
–
–
522
522
(638)
–
(25)
–
33
15
4,892
559
835
1,815
2,173
682
6,064
Year ended 31 December 2011
attributable to equity holders of the
company at beginning of the year
profit for the year
total comprehensive income for the year
Dividends for the year
Merger reserve realised in the year
Shares issued in lieu of cash dividends
Net purchase of treasury shares
Other movements in share capital and
share-based payment reserve
Fair value of equity-settled share options
attributable to equity holders of the
company at end of the year
Millions
Number of
shares issued
and fully
paid
Notes
Share
capital
Share
premium
Other
Reserves
Retained
earnings
5,695
570
795
2,708
–
–
–
–
99
–
7
–
–
–
–
–
10
–
–
–
–
–
–
–
–
–
10
–
–
–
–
(129)
–
–
–
12
601
838
838
(172)
129
114
(17)
–
–
Perpetual
preferred
callable
securities
£m
Total
688
5,362
44
44
(44)
–
–
–
–
–
882
882
(216)
–
124
(17)
10
12
5,801
580
805
2,591
1,493
688
6,157
1
Included within retained earnings of £2,173 million (2011: £ 1,493 million) are distributable reserves of £2,137 million (2011: £1,398 million).
other reserves
Merger reserve
Share-based payment reserve
Cancellation of treasury shares
attributable to equity holders of company at end of the year
at
31 December
2012
£m
At
31 December
2011
1,717
2,532
74
24
59
–
1,815
2,591
214
Old Mutual plcAnnual Report and Accounts 2012 Financial statements oF the company
notes to the company
Financial statements
For the year ended 31 December 2012
1 Financial assets and liabilities
company statement of financial position
The Company is principally involved in the management of its investments in subsidiaries, with its risks considered to be consistent with those in
the operations themselves. Full details of the financial risks are provided in the consolidated financial statements, note E1. The most important
components of financial risk for the Company are interest rate risk, currency risk, liquidity risk and credit risk. These risks arise from open
positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements.
(a) Categories of financial instruments
The financial instruments of the Company consist of derivative assets and liabilities, both of which are treated as held-for-trading, other assets
and cash and cash equivalents which are treated as loan and receivables, borrowed funds of which £547 million is designated as fair value
through the income statement and £113 million at amortised cost (2011: £637 million and £503 million respectively) and other liabilities which
are also measured at amortised cost. Of the financial assets and liabilities measured at fair value through the income statement, the hierarchy
classification (as detailed in the Group Financial Statements, note E1(b)) of derivative assets and liabilities is Level 2 and borrowed funds Level 1.
(b) Capital risk management
Old Mutual plc is the holding company of the Group and is responsible for the raising and allocation of capital in line with the Group’s capital
management policies set out in note E1 to the consolidated financial statements and for ensuring the operational funding and regulatory
capital needs of the holding company and its subsidiaries are met at all times.
(c) Currency risk
The Company is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows
through the impact that currency movements have on its derivative. The principal foreign currency risk arises from the fact that the Company’s
functional currency is pounds, whereas the functional currency of its principal operations is South African rand, US dollar, Swedish krona and
euro. The exposure of the Group to currency risk is disclosed in the consolidated financial statements, note E1(d). The Company hedges some
of this currency translation risk through currency swaps, currency borrowings and forward foreign exchange rate contracts. Exchange rate
exposures are managed within approved policy parameters utilising forward exchange contracts and currency swap agreements. A 10%
deterioration in the values of the major currencies the Company is exposed to in relation to pounds would result in an increase in the Company’s
equity holders’ funds of £31 million (2011: decrease of £297 million).
(d) Credit risk
The Company is principally exposed to credit risk through its derivative asset positions, holdings of cash and cash equivalents and the ability of
its subsidiaries to repay amounts due to the Company, which it holds to back shareholder liabilities. The exposure of the Group to credit risk is
disclosed in the consolidated financial statements, note E2. Credit risk is managed by placing limits on exposures to any single counterparty,
or groups of counterparties and to geographical and industry segments. Credit risk is monitored with reference to established credit rating
agencies with limits placed on exposure to below investment-grade holdings or the financial position of companies within the Group. Of the
Company’s financial assets bearing credit risk, derivative assets and cash and cash equivalents are rated as investment grade (being AAA to
BBB for Standard & Poor’s or an equivalent). The other financial assets bearing credit risk are not rated.
(e) Interest rate risk
Interest rate risk is the risk that fluctuating interest rates will unfavourably affect the Company’s earnings and the value of its assets, liabilities
and capital.
The Company employs currency and interest rate swap transactions to mitigate the impact of changes in the fair values of its borrowed funds.
Details of the arrangements in place are shown in the Group Financial Statements note E7 (Hedge accounting).
(f) Liquidity risk
Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. Ultimate responsibility for liquidity
risk management rests with the Board of directors, which has built an appropriate liquidity risk management framework for the management
of the Company’s short-, medium- and long-term funding and liquidity management requirements. The Company has net current assets of
£460 million (2011: £1,554 million), all of which represent liabilities to other Group companies. The Company manages liquidity risk by
maintaining adequate reserves, banking facilities and continuously monitoring forecast and actual cash flows of both the Company
and its subsidiaries.
The key information reviewed by the Company’s executive directors and Executive Committee, together with the Capital Management
Committee, is a detailed management report on the Company’s current and planned capital and liquidity position. Forecasts are updated
regularly based on when new information is received, and as part of the annual business planning cycle. The Company’s liquidity and capital
position and forecast is presented to the Company’s Board of directors on a regular basis.
Further information on liquidity and the Company’s cash flows is contained in other sections of this Annual Report, for example the business
review and Group Finance Director’s statement.
215
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business 2 Derivative financial instruments
The following tables provide a detailed breakdown of the contractual or notional amounts and the fair values of the Company’s derivative
financial instruments outstanding at the year-end. These instruments allow the Company to transfer, modify or reduce foreign exchange and
interest rate risks.
The Company undertakes transactions involving derivative financial instruments with other financial institutions. Management has established
limits commensurate with the credit quality of the institutions with whom it deals, and manages the resulting exposures such that a default by any
individual counterparty is unlikely to have a materially adverse impact on the Company.
at December 2012
At December 2011
Fair values
Fair values
assets
liabilities
Assets
Liabilities
£m
exchange rate contracts
Swaps
Forwards
interest rate contracts
Swaps
total
The contractual maturities of the derivative liabilities held are as follows:
10
–
10
86
96
–
8
8
–
8
30
–
30
56
86
Balance
sheet
amount
less than
3 months
more than
3 months
less than
1 year
Between
1 and 5
years
more than
5 years
no
contractual
maturity
date
8
3
8
3
–
–
–
–
–
–
–
–
–
3
3
–
3
£m
total
8
3
at
31 December
2012
112
547
659
at
31 December
2012
547
112
659
£m
At
31 December
2011
503
637
1,140
£m
At
31 December
2011
637
503
1,140
at 31 December 2012
Derivative financial liabilities
At 31 December 2011
Derivative financial liabilities
3 Borrowed funds
Senior debt securities and term loans
Subordinated debt securities
total borrowed funds
Fair valued through income statement
Amortised cost
total borrowed funds
216
Old Mutual plcAnnual Report and Accounts 2012financial statements of the company notes to the company financial statementsFor the year ended 31 December 2012 The table below is a maturity analysis of liability cash flows based on contractual maturity dates for borrowed funds. Maturity analysis is
undiscounted and based on year-end exchange rates. In addition to the contractual cash flows detailed below, the Company is obligated to
make interest payments on borrowed funds, details of which are in the Group consolidated financial statements in note E9.
Less than 1 year
Greater than 1 year and less than 5 years
Greater than 5 years
Borrowed funds
at
31 December
2012
£m
At
31 December
2011
–
112
500
612
167
503
470
1,140
Additional details of these borrowings and undrawn facilities are included in Group consolidated financial statements in note E9.
4 Other assets
Other receivables
Corporation tax
Accrued interest and rent
Other prepayments and accrued income
Amounts owed by Group undertakings:
Amounts falling due within one year
Amounts falling after one year
total other assets
5 Other liabilities
Accruals and deferred income
Amounts owed to Group undertakings:
Amounts falling due within one year
Amounts falling due after one year
total other liabilities
6 Provisions
Post-employment benefits
Other
total provisions
at
31 December
2012
£m
At
31 December
2011
27
7
4
4
524
1,669
2,235
31
179
12
6
405
1,621
2,254
at
31 December
2012
£m
At
31 December
2011
20
28
654
3,702
4,376
2,711
2,645
5,384
Notes
7
at
31 December
2012
£m
At
31 December
2011
9
–
9
11
1
12
217
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business 7 Post-employment benefits
The Company holds a provision in respect of the Old Mutual Staff Pension Fund Defined Benefit pension scheme, which provides benefits
based on final pensionable pay for members within the Group. The assets of the scheme are held in separate trustee-administered funds.
Pension costs and contributions relating to the scheme are assessed in accordance with the advice of qualified actuaries. Actuarial advice
confirms that the current level of contributions payable to the scheme, together with existing assets, are adequate to secure members’ benefits
over the remaining lives of participating employees. The scheme is reviewed on a triennial basis. In the intervening years the actuary reviews
the continuing appropriateness of the assumptions applied. During the year two employees (2011: 2) were directly employed by the Company.
The costs for these directors and ex-directors are disclosed within the Remuneration Report on pages 99 to 116.
liability for defined benefit obligations
change in projected benefit obligations
Projected benefit obligation at beginning of the year
Interest cost on benefit obligations
Benefits paid
Actuarial (losses)
projected benefit obligations at end of the year
change in plan assets
Plan assets at fair value at beginning of the year
Actual return on plan assets
Benefits paid
Company contributions
plan assets at fair value at end of the year
net liability recognised in balance sheet
Funded status of plan
Recognised actuarial – gain
net amount recognised in balance sheet
expense recognised in the income statement
Expected return on plan assets
Interest costs
total
£m
pension plans
year ended
31 December
2012
Year ended
31 December
2011
65
3
1
(1)
68
55
3
(2)
4
60
8
1
9
62
3
1
(1)
65
47
5
(1)
4
55
10
1
11
£m
pension plans
year ended
31 December
2012
Year ended
31 December
2011
2
(3)
(1)
2
(3)
(1)
Actuarial assumptions used in calculating the projected benefit obligation are based on relevant mortality estimates, with a specific allowance
made for future improvements in mortality which is broadly in line with that adopted for the 92 series of mortality tables prepared by the
Continuous Mortality Investigation Bureau of the Institute of Actuaries. The expected returns on plan assets have been determined on the basis
of long-term expectations, the carrying value of the assets and the market conditions at the balance sheet date specific to the relevant locations.
The detailed actuarial assumptions can be viewed on the Group’s website at www.oldmutual.com.
plan asset allocation
Equity securities
Debt securities
Other investments
218
%
pension plans
at
31 December
2012
At
31 December
2011
40
58
2
35
63
2
Old Mutual plcAnnual Report and Accounts 2012financial statements of the company notes to the company financial statementsFor the year ended 31 December 2012 8 Principal subsidiaries
Balance at beginning of the year
Acquisitions
Additions
Disposals
Impairments
Transfer to non-current assets held for sale
Balance at end of the year
at
31 December
2012
£m
At
31 December
2011
7,805
515
2,220
(160)
(2,101)
(128)
8,151
9,373
12
2,501
(22)
(1,975)
(2,084)
7,805
On 17 February 2012, the Company purchased 10,000,000 ordinary “B” shares of USD 1 each of capital in Millpencil Limited for
a consideration of $10 million.
On 12 April 2012, the Company purchased 820,000,000 ordinary shares of USD 1 each in Old Mutual Holdings (Bahamas) Limited
for consideration of $820 million.
On 16 May 2012, the Company purchased 600,000 ordinary shares of USD 1 each in Old Mutual Reassurance (Ireland) Limited for
consideration of $16 million.
On 21 June 2012, the Company received the investment in Old Mutual Finance (IOM) of £1,844 million as a dividend in specie from
Skandia UK Limited. On the same date, the Company impaired its investment in Skandia UK Limited by £1,801 million.
On 6 July 2012, the Company completed the sale of Millpencil Limited for consideration of $202 million to OM Group (UK) Limited.
On 20 August 2012, the Company increased its investment in the ordinary share capital of Constantia by £1 million.
On 19 September 2012, the Company increased its investment in Old Mutual Europe GMBH by €429 million.
During December 2012, the Company impaired the investments in Skandia Europe Latin America Holdings by £300 million.
Also included within additions is the Company’s investment in subsidiary undertakings in respect of movements on the share based payments
(£12 million).
The principal subsidiary undertakings of the Company are as follows:
at 31 December 2012
Old Mutual Finance (IOM)
OM Group (UK) Ltd
Old Mutual Wealth Management Ltd
Skandia Europe and Latin America (Holdings) Limited
Old Mutual Europe GMBH
Old Mutual plc Brands AB
country of
incorporation
Isle of Man
England & Wales
England & Wales
England & Wales
England & Wales
Sweden
class of shares
% interest held
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
A complete list of subsidiaries is filed with the UK Registrar of Companies with the annual return. All the above companies have a year-end of
31 December.
9 Investments in associated undertakings
The Company holds the following interest in associated undertakings:
Kotak Mahindra Old Mutual Life Insurance Limited
Country of
operation
India
% interest
held
26
at
31 December
2012
£m
At
31 December
2011
26
26
219
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business 10 Investments and securities
Government and government-guaranteed securities
total investments and securities
at
31 December
2012
167
167
£m
At
31 December
2011
–
–
The government and government-guaranteed securities above are all rated AAA. The intention is to hold these investments to maturity.
11 Commitments, guarantees and contingent liabilities
Commitments
at
31 December
2012
£m
At
31 December
2011
–
498
The commitments related to letters of credit issued in support of the operations of a subsidiary company. These commitments were cancelled
on 5 October 2012.
In February 2008, the Company issued a guarantee to a third-party over a subsidiary’s (Old Mutual Bermuda) obligations under the reinsurance
contracts relating to the offshore investment products sold by a third-party. The maximum payment under this guarantee is $250 million.
This guarantee is accounted for as an insurance contract and payments will only arise should Old Mutual Bermuda be unable to meet its
obligations under the relevant reinsurance contracts as they fall due.
12 Related parties
Old Mutual plc enters into transactions with its subsidiaries in the normal course of business. These are principally related to funding of the Group’s
businesses and head office functions. Details of loans, including balances due from/to the Company accounts, are set out below. Disclosures
in respect of the key management personnel of the Company are included in the Group accounts related parties disclosures in note G3.
There are no transactions entered into by the Company with associated undertakings.
Balances due from subsidiaries
Balances due to subsidiaries
Balances due from other related parties – Fairbairn Trust Company Limited
income statement information
at
31 December
2012
2,190
(4,355)
2
£m
At
31 December
2011
2,025
(5,357)
2
Subsidiaries
year ended 31 December 2012
Year ended 31 December 2011
interest
paid
ordinary
dividends
received1
(99)
2,873
other
amounts
paid
(76)
Interest
paid
(66)
Ordinary
dividends
received
2,911
Other
amounts
paid
(76)
1 Dividends received during the year included £1,844 million from Skandia (UK) Limited, being the payment of a dividend in specie of its investment in OMF (IOM) to the Company.
13 Non-current assets held for sale
The Company has entered into a contract to sell Skandia Europe Latin and America Holdings to Old Mutual (South Africa) (Proprietary) Limited.
The agreed consideration is R1,784,000,000. As a result of this, the investment Skandia Europe Latin and America Holdings has been classified
as held for sale in the statement of financial position for the current year in accordance with IFRS 5.
220
Old Mutual plcAnnual Report and Accounts 2012financial statements of the company notes to the company financial statementsFor the year ended 31 December 2012 What
we do
Where we
are going
How we
have
performed
Our risks
Financials
How we govern our business
mceV
Index to MCEV
For the year ended
31 December 2012
Adjusted Group MCEV by line of business
Adjusted operating Group MCEV statement
of earnings
Significant corporate activities and
business changes
Adjusted operating Group MCEV earnings
per share
Group market consistent embedded value
statement of earnings
Notes to the MCEV basis supplementary
information
■ A: MCEV policies
■ B: Segment information
■ C: Other key performance information
■ D: Sensitivity tests
224
225
225
226
227
228
237
244
247
221
Financials MCEV
StatEMEnt of
DirECtorS’ rESponSibilitiES
in relation to the Market Consistent Embedded Value basis supplementary information
The directors of Old Mutual plc have chosen to prepare supplementary information on a Market Consistent Embedded Value (MCEV) basis.
Old Mutual’s methodology adopts the Market Consistent Embedded Value Principles (Copyright © Stichting CFO Forum Foundation 2008)
issued in June 2008 and updated in October 2009 by the CFO Forum (the Principles) as the basis for the methodology. The Principles have
been fully complied with at 31 December 2012 for all businesses.
In preparing the MCEV supplementary information, the directors have:
■ Prepared the supplementary information in accordance with the methodology described above and the basis of preparation as set out on
page 228
■ Identified and described the business covered by the MCEV methodology
■ Applied the MCEV methodology consistently to the covered business
■ Determined assumptions on a market consistent basis and operating assumptions on a best estimate entity-specific basis, having regard to
past, current and expected future experience and to any relevant external data, and then applied them consistently; and
■ Where relevant, made estimates that are reasonable and consistent.
Julian roberts
Group Chief Executive
philip broadley
Group Finance Director
1 March 2013
222
Old Mutual plcAnnual Report and Accounts 2012 MCEV
inDEpEnDEnt
auDitorS’ rEport
to Old Mutual plc on the Market Consistent Embedded Value
basis supplementary information
We have audited the Market Consistent Embedded Value (MCEV) basis supplementary information (the supplementary information) of
Old Mutual plc (the Company) for the year ended 31 December 2012 set out on pages 224 to 248. The financial reporting framework that has
been applied in the preparation of the supplementary information is the Market Consistent Embedded Value Principles issued in October 2009
by the European CFO Forum (the MCEV Principles) using the methodology and assumptions set out on pages 228 to 236. The supplementary
information should be read in conjunction with the Group financial statements which are on pages 120 to 211.
This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we
might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we
have formed.
respective responsibilities of directors and auditors
As explained more fully in the Directors’ responsibilities statement set out on page 222, the directors have accepted responsibility for the
preparation of the supplementary information on an MCEV basis in accordance with the MCEV Principles.
Our responsibility is to audit, and express an opinion on, the supplementary information in accordance with the terms of our engagement and
in accordance with International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices
Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the supplementary information
An audit involves obtaining evidence about the amounts and disclosures in the supplementary information sufficient to give reasonable
assurance that the supplementary information is free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the
supplementary information.
In addition we read all the financial and non-financial information in the Old Mutual plc Annual Report to identify material inconsistencies with
the audited supplementary information. If we become aware of any apparent material misstatements or inconsistencies we consider the
implications for our report.
opinion on the supplementary information
In our opinion, the MCEV basis supplementary information of the Company for the year ended 31 December 2012 has been properly
prepared, in all material respects, in accordance with the MCEV Principles using the methodology and assumptions set out on page 228.
philip Smart
for and on behalf of KpMG audit plc
Chartered Accountants
15 Canada Square
London E14 5GL
1 March 2013
F
i
n
a
n
c
i
a
l
s
223
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business MCEV
aDJuStED Group MCEV
by linE of buSinESS
At 31 December 2012
MCEV of the core covered business (long-term Savings)
Adjusted net worth1
Value of in-force business
MCEV of the non-core covered business (old Mutual bermuda)
Adjusted net worth
Value of in-force business
MCEV of the discontinued covered business (nordic)2
Adjusted net worth
Value of in-force business
adjusted net worth of asset management and other businesses
Emerging Markets
Old Mutual Wealth
US Asset Management
Nordic2
Value of the banking business
Nedbank (market value)
Emerging Markets (adjusted net worth)
Nordic (adjusted net worth)2
Value of the general insurance business
Mutual & Federal (adjusted net worth)
net other business3
adjustment for present value of black Economic Empowerment scheme
deferred consideration
adjustment for value of own shares in ESop schemes4
Market value of perpetual preferred securities5
Market value of perpetual preferred callable securities
Market value of subordinated debt
adjusted Group MCEV
adjusted Group MCEV per share (pence)
Number of shares in issue at the end of the financial period less treasury shares – millions6
Notes
B3
B3
B3
at
31 December
2012
£m
At
31 December
2011
5,740
2,284
3,456
625
680
(55)
–
–
–
1,772
444
225
1,103
–
3,574
3,527
47
–
261
45
245
126
–
(686)
(921)
10,781
220.3
4,893
5,713
2,204
3,509
66
187
(121)
1,433
285
1,148
1,955
499
179
1,270
7
3,286
2,935
29
322
294
175
270
117
(465)
(605)
(1,445)
10,794
194.1
5,562
1 Adjusted net worth is after the elimination of inter-company loans.
2 The sale of the Nordic business unit was completed 21 March 2012.
3
Includes any other business that is not included within the main lines of business, largely Old Mutual parent company IFRS equity net of Group adjustments, consolidation
adjustments in respect of inter-company transactions and debt and Old Mutual Bermuda asset management.
Includes adjustment for value of excess own shares in employee share scheme trusts.
4
5 On 24 September 2012, the Group repaid the US$750 million cumulative preference securities at their nominal value.
6 The Group cancelled 239 million treasury shares on 13 January 2012. As part of the disposal of the Nordic business unit, a seven for eight share consolidation was proposed
and approved. For adjusted Group MCEV per share, the weighted average number of shares is effective from 23 April 2012.
224
Old Mutual plcAnnual Report and Accounts 2012 MCEV
aDJuStED opEratinG Group
MCEV StatEMEnt of EarninGS
For the year ended 31 December 2012
long-term Savings
Covered business
Asset management and other business
Banking
nedbank
Banking
Mutual & federal
General insurance
uS asset Management
Asset management
other operating segments
Finance costs1
Corporate costs2
Other shareholders’ income/(expenses)
adjusted operating Group MCEV earnings before tax from core operations
Notes
B2
£m
year ended
31 December
2012
Year ended
31 December
2011
454
125
15
594
828
43
91
(148)
(40)
–
1,368
714
123
15
852
755
89
67
(155)
(43)
(18)
1,547
1 This includes interest payable from Old Mutual plc to non-core operations of £18 million for the year ended 31 December 2012 (December 2011: £27 million).
2 Central costs of £14 million are allocated to the covered business and provisioned in the VIF (December 2011: £14 million). Hence net corporate costs under MCEV
of £40 million (December 2011: £43 million) differ from the IFRS amount of £54 million (December 2011: £57 million).
Significant corporate activities and business changes
Disposal of nordic business
As previously reported, the Group had agreed at 31 December 2011 to dispose of its life assurance, asset management and banking
operations in Sweden, Denmark and Norway to Skandia Liv. Following final regulatory approval, on 8 March 2012, and subsequent
shareholder approval, the sale was completed on 21 March 2012. The MCEV earnings of the Nordic business have been categorised as
discontinued within the MCEV results and the comparative information has been restated where applicable to reflect this. Nordic has been
treated as non-modeled for 2012 reporting purposes with earnings for the period to 21 March 2012 reported on an IFRS basis.
The transaction has resulted in an uplift of £201 million to the adjusted Group MCEV, based on the differences between the purchase price of
£2,118 million, the removal of the MCEV balances for the Nordic business unit (VIF: £1,148 million, ANW: £286 million and other non-covered
business: £330 million) and further IFRS adjustments of £153 million.
reporting of retail Europe within old Mutual Wealth
On 24 January 2012 the Group announced that it will combine its Old Mutual Wealth Continental Europe business (France and Italy) with the
Skandia Retail Europe business unit (Germany, Austria, Poland and Switzerland), for reporting purposes only. As a result the Retail Europe
segment is reported as part of the Old Mutual Wealth segment for the year ended 31 December 2012. The comparative information for the
year ended 31 December 2011 has been reclassified where applicable to reflect this.
Further, in September 2012, the Group announced the merger of the Skandia businesses (Skandia UK, Skandia International, Old Mutual
Global Investors and the Skandia European businesses outside of the Nordic region) into a single business called Old Mutual Wealth.
old Mutual bermuda capital resources and requirements
The Bermuda Monetary Authority (BMA) enacted its new Class E Prudential rules in December 2011. In July 2012, it was agreed with the BMA
that the Old Mutual Bermuda business should now directly hold capital resources comparable to those we expect to be required under
Solvency II, as calculated by the Group’s existing internal capital model, which were previously held centrally. The capital requirements have
been kept constant since July 2012.
In order to address the increased capital requirements, an injection of £352 million into Old Mutual Bermuda was made on 23 July 2012,
comprising £154 million plc loan notes, the transfer of ownership of seed capital in the US asset management business of £161 million and
an injection of £37 million cash to purchase US treasuries.
225
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business MCEV
aDJuStED opEratinG Group
MCEV EarninGS pEr SharE
For the year ended 31 December 2012
year ended 31 December 2012
adjusted operating Group MCEV earnings before tax
Covered business
Other business
Tax on adjusted operating Group MCEV earnings
Covered business
Other business
adjusted operating Group MCEV earnings after tax
Non-controlling interests
Ordinary shares
Preferred securities
adjusted operating MCEV earnings after tax attributable
to equity holders
adjusted operating Group MCEV earnings per share1
Adjusted weighted average number of shares – millions
Year ended 31 December 2011
adjusted operating Group MCEV earnings before tax
Covered business
Other business
Tax on adjusted operating Group MCEV earnings
Covered business
Other business
adjusted operating Group MCEV earnings after tax
Non-controlling interests
Ordinary shares
Preferred securities
adjusted operating MCEV earnings after tax attributable to
equity holders
adjusted operating Group MCEV earnings per share1
Adjusted weighted average number of shares – millions
Notes
B2
B2
Notes
B2
B2
Core
continuing
operations
1,368
454
914
(376)
(118)
(258)
992
(277)
(50)
665
13.2
Core
continuing
operations
1,547
714
833
(364)
(162)
(202)
1,183
(255)
(62)
866
15.9
non-core
continuing
operations
Discontinued
operations
99
99
–
–
–
–
99
–
–
99
2.0
28
18
10
(3)
–
(3)
25
–
–
25
0.5
Non-core
continuing
operations
Discontinued
operations
48
48
–
(1)
(1)
–
47
–
–
47
0.9
173
156
17
(31)
(28)
(3)
142
–
–
142
2.6
£m
total
1,495
571
924
(379)
(118)
(261)
1,116
(277)
(50)
789
15.7
5,029
£m
Total
1,768
918
850
(396)
(191)
(205)
1,372
(255)
(62)
1,055
19.4
5,435
1 Adjusted operating Group MCEV earnings per share is calculated on the same basis as adjusted operating Group MCEV earnings, but is stated after tax and non-controlling
interests. It excludes income attributable to Black Economic Empowerment trusts of listed subsidiaries. The calculation of the adjusted weighted average number of shares
includes own shares held in policyholders’ funds and Black Economic Empowerment trusts.
226
Old Mutual plcAnnual Report and Accounts 2012 MCEV
Group MarKEt ConSiStEnt
EMbEDDED ValuE StatEMEnt
of EarninGS
For the year ended 31 December 2012
adjusted operating Group MCEV earnings before tax from core operations
Adjusted operating Group MCEV earnings before tax from Old Mutual Bermuda non-core operations
Adjusted operating Group MCEV earnings before tax from continuing operations1
Adjusting items from continuing operations
total Group MCEV earnings before tax from continuing operations
Income tax attributable to shareholders
total Group MCEV earnings after tax from continuing operations
Total Group MCEV earnings after tax from discontinued operations
MCEV earnings after tax from discontinued operations2
Group MCEV uplift from sale of Nordic
Other Group adjustments related to the Nordic disposal3
total Group MCEV earnings after tax for the financial year
total Group MCEV earnings for the financial period attributable to:
Equity holders of the parent
non-controlling interests
Ordinary shares
Preferred securities
total Group MCEV earnings after tax for the financial year
basic total Group MCEV earnings per ordinary share (pence)
Weighted average number of shares – millions
year ended
31 December
2012
Notes
£m
Year ended
31 December
2011
C2
1,368
99
1,467
486
1,953
(490)
1,463
600
6
201
393
2,063
1,749
264
50
2,063
36.7
4,768
1,547
48
1,595
(437)
1,158
(168)
990
(15)
(15)
–
–
975
674
239
62
975
13.1
5,136
1
2
3
For long-term business and general insurance businesses, adjusted operating Group MCEV earnings are based on long-term and short-term investment returns respectively,
include investment returns on life fund investments in Group equity and debt instruments, and are stated net of income tax attributable to policyholder returns. For the US asset
management business it includes compensation costs in respect of certain long-term incentive schemes defined as non-controlling interests in accordance with IFRS. For all
businesses, adjusted operating MCEV earnings exclude goodwill impairment, the impact of acquisition accounting, option revaluations related to long-term incentive schemes,
the impact of closure of unclaimed shares trusts, profit/(loss) on acquisition/disposal of subsidiaries, associated undertakings and strategic investments, dividends declared to
holders of perpetual preferred callable securities, and fair value (profits)/losses on certain Group debt instruments.
For Nordic, these are composed of earnings before tax of £28 million (2011: £173 million), adjusting items of £(20) million (2011: £(161) million) and tax
of £(2) million (2011: £(27) million).
Included in Other Group adjustments related to the Nordic disposal is £350 million related to the realisation of foreign exchange reserve on disposal. This was previously
included in equity translation reserves.
reconciliation of movements in Group and adjusted Group MCEV (after tax)
opening Group MCEV
Adjusted operating MCEV earnings
Non-operating MCEV earnings
total Group MCEV earnings
Other movements in IFRS net equity
Closing Group MCEV
Adjustments to bring Group investments
to market value
adjusted Group MCEV
year ended 31 December 2012
Year ended 31 December 2011
£m
Notes
B4
C3
B1
Covered
business
MCEV
non-covered
business
ifrS
7,212
2,516
453
473
926
(1,773)
6,365
–
6,365
336
487
823
(512)
2,827
1,589
4,416
total
Group
MCEV
9,728
789
960
1,749
(2,285)
9,192
1,589
10,781
Covered
business
MCEV
7,515
727
(331)
396
(699)
7,212
–
7,212
Non-covered
business
IFRS
2,386
328
(50)
278
(148)
2,516
1,066
3,582
Total
Group
MCEV
9,901
1,055
(381)
674
(847)
9,728
1,066
10,794
227
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business MCEV
notES to thE MCEV baSiS
SupplEMEntary inforMation
For the year ended 31 December 2012
A: MCEV policies
a1: basis of preparation
The Market Consistent Embedded Value methodology (referred to herein and in the supplementary statements on pages 224 to 248 as MCEV)
adopts the Market Consistent Embedded Value Principles (Copyright © Stichting CFO Forum Foundation 2008) issued in June 2008 and
updated in October 2009 by the CFO Forum (the Principles) as the basis for the methodology used in preparing the supplementary information.
The CFO Forum announced changes to the MCEV Principles in October 2009 to reflect inter alia the inclusion of a liquidity premium.
These changes affirm that the risk free reference rate to be applied under MCEV should include both the swap yield curve appropriate
to the currency of the cash flows and a liquidity premium where appropriate.
The Principles have been materially complied with for all businesses at 31 December 2012. The detailed methodology and assumptions made
in presenting this supplementary information are set out in notes A2 and A3.
Throughout the supplementary information the following terminology is used to distinguish between the terms MCEV, Group MCEV and
adjusted Group MCEV:
■ MCEV is a measure of the consolidated value of shareholders’ interests in the covered business and consists of the sum of the shareholders’
adjusted net worth in respect of the covered business and the value of the in-force covered business
■ Group MCEV is a measure of the consolidated value of shareholders’ interests in covered and non-covered business. Non-covered business
is valued at the IFRS net asset value detailed in the primary financial statements, adjusted to eliminate inter-company loans
■ Adjusted Group MCEV, a measure used by management to assess the shareholders’ interest in the value of the Group, includes the impact of
marking all debt to market value, the market value of the Group’s listed banking subsidiary, marking the value of deferred consideration due
in respect of Black Economic Empowerment arrangements in South Africa (the BEE schemes) to market, as well as including the market value
of excess own shares held in ESOP schemes.
a2: Methodology
(a) Introduction
MCEV represents the present value of shareholders’ interests in the earnings distributable from assets allocated to the in-force covered business
after sufficient allowance for the aggregate risks in the covered business, and is measured in a way that is consistent with the value that would
normally be placed on the cash flows generated by these assets and liabilities in a deep and liquid market. MCEV is therefore a risk-adjusted
measure to the extent that financial risk is reflected through the use of market consistent techniques in the valuation of both assets and distributable
earnings and a transparent explicit allowance is made for non-financial risks.
MCEV consists of the sum of the following components:
■ Adjusted net worth, which excludes acquired intangibles and goodwill, consisting of:
— free surplus allocated to the covered business; and
— required capital to support the covered business.
■ Value of in-force covered business (VIF).
The adjusted net worth is the market value of shareholders’ assets held in respect of the covered business after allowance for the liabilities
which are dictated by local regulatory reserving requirements.
MCEV is calculated net of non-controlling shareholder interests and excludes the value of future new business.
(b) Coverage
Covered business includes, where material, any contracts that are regarded by local insurance supervisors as long-term life assurance business,
and other business, where material, directly related to such long-term life assurance business where the profits are included in the IFRS
long-term business profits in the primary financial statements. For the life businesses in Kenya, Malawi, Nigeria, Swaziland and Zimbabwe,
and where the covered business is not material, the treatment within this supplementary information is the same as in the primary financial
statements, ie expected future profit for this business is not capitalised for MCEV reporting purposes.
For December 2011 comparatives, the covered business does not include any business written in Skandia Liv, a mutual life insurance company
then part of the Group.
Some types of business are legally written by a life company, but under IFRS are classified as asset management because long-term business
only serves as a wrapper. This business continues to be excluded from covered business, for example:
■ New institutional investment platform pensions business written in the United Kingdom, as it is more appropriately classified as unit trust
business; and
■ Individual unit trusts and some Group market-linked business written by the asset management companies in South Africa through the life
company, as profits from this business arise in the asset management and asset administration companies.
228
Old Mutual plcAnnual Report and Accounts 2012 The treatment within this supplementary information of all business other than the covered business is the same as in the primary financial
statements. The adjusted Group MCEV includes the impact of marking all debt to market value, the market value of the Group’s listed
banking subsidiary, marking the value of deferred consideration due in respect of Black Economic Empowerment arrangements in South Africa
(the BEE schemes) to market, as well as including the market value of excess own shares held in ESOP schemes.
(c) Free surplus
Free surplus is the market value of any assets allocated to, but not required to support, the in-force covered business. It is determined as the
market value of any excess assets attributed to the covered business but not backing the regulatory liabilities, less the required capital to
support the covered business.
(d) Required capital
Required capital is the market value of assets that is attributed to support the covered business, over and above that required to back statutory
liabilities for covered business, whose distribution to shareholders is restricted. The following capital measures are considered in determining
the required capital held for covered business so that it reflects the level of capital considered by the directors to be appropriate to manage
the business:
■ Economic capital
■ Regulatory capital, ie the level of solvency capital which the local regulators require
■ Capital required by rating agencies in order to maintain the desired credit rating; and
■ Any other required capital definition to meet internal management objectives.
Economic capital for the covered business is based upon Old Mutual’s own internal assessment of risks inherent in the underlying business.
It measures capital requirements on a basis consistent with a 99.93% confidence level over a one-year time horizon.
For Emerging Markets and Old Mutual Wealth, capital determined with reference to internal management objectives is the most onerous and
is he capital measure used, whilst for Nordic the regulatory capital requirement was the most onerous in 31 December 2011 comparatives.
For Old Mutual Bermuda the required capital is equal to regulatory capital, which is a change from December 2011, where internal capital (ie
the adjusted net worth) was used.
The required capital in respect of OMLAC(SA)’s covered business is partially covered by the market value of the Group’s investments in banking
and general insurance in South Africa. On consolidation these investments are shown separately.
The table below shows the level of required capital expressed as a percentage of the minimum local regulatory capital requirements.
Emerging Markets
Old Mutual Wealth1
Old Mutual Bermuda2
Nordic
total
at 31 December 2012
£m
At 31 December 2011
Notes
B3
B3
B3
B3
required
capital
(a)
1,312
294
433
n/a
regulatory
capital
(b)
923
212
433
n/a
2,039
1,568
ratio
(a/b)
1.4
1.4
1.0
n/a
1.3
Required
capital
(a)
1,368
314
187
127
Regulatory
capital
(b)
1,012
241
77
127
1,996
1,457
Ratio
(a/b)
1.4
1.3
2.4
1.0
1.4
1
Local regulators within many of the Old Mutual Wealth countries allow intangible assets to be included as admissible regulatory capital. In such cases the required capital
reported for MCEV is net of these items, although each of the countries continues to be sufficiently capitalised on the local solvency basis. Skandia Leben in Germany is
permitted under local regulations to include the unallocated policyholder profit-sharing liability as admissible capital.
2 During December 2011, the BMA insurance (Prudential Standards) (Class E Solvency Requirements) Rules 2011 were formally signed into Bermudan law. The regulations allow
for a transition period for the new capital requirement (50% for financial year 2011). The required capital calculated on this statutory basis was approximately £77 million at
31 December 2011. In July 2012 it was agreed with the BMA that Old Mutual Bermuda business should hold capital resources of £433 million, comparable to those expected to
be required under Solvency II, as calculated by the Group’s existing internal capital model. The capital requirement is held at a fixed amount between statutory filing dates and
the July 2012 requirement has therefore been kept constant for 31 December 2012.
229
FinancialsFinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our business A: MCEV policies continued
a2: Methodology continued
(e) Value of in-force covered business
Under the MCEV methodology, VIF consists of the following components:
■ Present value of future profits (PVFP) from in-force covered business; less
■ Time value of financial options and guarantees; less
■ Frictional costs of required capital; less
■ Cost of residual non-hedgeable risks (CNHR).
Projected liabilities and cash flows are calculated net of outward risk reinsurance with allowance for default risk of reinsurance counterparties
where material.
(f) Present value of future profits
The PVFP is calculated as the discounted value of future distributable earnings (taking account of local statutory reserving requirements) that
are expected to emerge from the in-force covered business, including the value of contractual renewal of in-force business, on a best estimate
basis where assumed earned rates of return and discount rates are equal to the risk-free reference rates. This is also known as a deterministic
certainty equivalent valuation of future distributable earnings, and is described in more detail in note A3. Any limitations on distribution of
such earnings due to statutory or internal capital requirements are taken into account separately in the calculation of frictional costs of
required capital.
PVFP captures the intrinsic and time value of financial options and guarantees on in-force covered business which are included in the local
statutory reserves according to local requirements, but excludes any additional allowance for the time value of financial options and guarantees.
(g) Financial options and guarantees
Allowance is made in the MCEV for the potential impact of variability of investment returns (ie asymmetric impact), on future shareholder cash
flows of policyholder financial options and guarantees within the in-force covered business.
The time value of financial options and guarantees describes that part of the value of financial options and guarantees that arises from the
variability of future investment returns on assets to the extent that it is not already included in the statutory reserves. The calculations are based
on market consistent stochastic modeling techniques where the actual assets held at the valuation date are used as the starting point for the
valuation of such financial options and guarantees. Projected cash flows are valued using economic assumptions such that they are valued in
line with the price of similar cash flows that are traded in the capital markets. The time value represents the difference between the average
value of shareholder cash flows under many generated economic scenarios and the deterministic shareholder value under the best estimate
assumptions for the equivalent business. Closed form solutions are also applied in Europe, provided the nature of any guarantees is not complex.
The time value of financial options and guarantees also includes allowance for potential burn-through costs on participating business,
ie the extent to which shareholders are unable to recover a loan made to participating funds to meet either regulatory or internal
capital management requirements or the extent to which reserves are inadequate to meet benefit payments during periods of severely
adverse experience.
In the generated economic scenarios allowance is made, where appropriate, for the effect of dynamic management and/or policyholder
actions in different circumstances:
■ Management has some discretion in managing exposure to financial options and guarantees, particularly within participating business.
Such dynamic management actions are reflected in the valuation of financial options and guarantees provided that such discretion is
consistent with established and justifiable practice taking into account policyholders’ reasonable expectations (eg with due consideration
of the Principles and Practices of Financial Management (PPFM), for South African business), subject to any contractual guarantees and
regulatory or legal constraints, and has been passed through an appropriate approval process by the local Executive team and, where
applicable, the Board. Assumptions that depend on the market performance (such as bonus rates) are set relative to the risk free reference
rates (subject to contractual guarantees) and assuming that all market participants are subjected to the same market conditions
■ Where credible evidence exists that persistency rates are linked to economic scenarios, allowance is made for dynamic policyholder
behaviour in response to changes in economic conditions
■ Modeled dynamic management and policyholders’ actions include the following:
— changes in future bonus rates subject to contractual guarantees, including removing all or part of previously declared non-vested
balances where circumstances warrant such action
— dynamic persistency rates for the Old Mutual Bermuda business, and dynamic guaranteed annuity option take-up rates for the South
African business driven by changes in economic conditions and management actions; and
— changes in surrender values.
In determining the time value of financial options and guarantees, an appropriate number of simulations are run to ensure that a reasonable
degree of convergence of results has been obtained.
230
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 Europe
Whilst certain products within the European businesses provide financial options and guarantees, these are immaterial due to the
predominantly unit-linked nature of the business.
Emerging Markets
The financial options and guarantees mainly relate to maturity guarantees and guaranteed annuity options.
As required by the applicable Actuarial Society of South Africa guidance note, the time value of the financial options and guarantees included
in the statutory reserves in the Emerging Markets businesses at 31 December 2012 has been valued using a risk-neutral market consistent asset
model, and is referred to as the ‘Investment Guarantee Reserve’ (IGR). This reserve includes a discretionary margin as defined by local
guidelines to allow for the sensitivity of the reserve to market movements, including interest rates, equity levels and the volatility implicit in the
pricing of derivative instruments in these markets. This discretionary margin is valued in the VIF.
Old Mutual Bermuda
The financial options and guarantees mainly relate to the guaranteed minimum accumulation benefits on variable annuity contracts.
(h) Frictional costs of required capital
From the shareholders’ viewpoint there is a cost due to restrictions on the distribution of required capital that is locked in entities within the
Group. Where material, an allowance has been made for the frictional costs in respect of the taxation on investment return (income and capital
gains) and investment costs on the assets backing the required capital for covered business. The allowance for taxation is based on the taxation
rates applicable to investment earnings on assets backing the required capital, although such tax rates are reduced, where applicable, to allow
for interest paid on debt which is used partly to finance the required capital.
The run-off pattern of the required capital is projected on an approximate basis over the lifetime of the underlying risks in line with drivers
of the capital requirement. The same drivers are used to split the total required capital between existing business and new business.
The allowance for frictional costs is independent of the allowance for the cost of residual non-hedgeable risks as described below.
(i) Cost of residual non-hedgeable risks
Sufficient allowance for most financial risks has been made in the PVFP and the time value of financial options and guarantees by using
techniques that are similar to the type of approaches used by capital markets. In addition the modeling of some non-hedgeable non-financial
risks is incorporated as part of the calculation of the PVFP (eg to the extent that expected operational losses are incorporated in the
maintenance expense assumptions) or the time value of financial options and guarantees (eg dynamic policyholder behaviour such as the
interaction of the investment scenario and the persistency rates). Residual non-financial risks include, for example, liability risks such as mortality,
longevity and morbidity risks; business risks such as persistency, expense and reinsurance credit risks; and operational risk.
For Old Mutual Bermuda, in addition to the allowance for residual non-hedgeable risks, CNHR includes an allowance for hedge
ineffectiveness risk and credit spread risk, which are not modeled in the PVFP or TVOG calculations.
An allowance is made in the CNHR to reflect uncertainty in the best estimate of shareholder cash flows as a result of both symmetric and
asymmetric non-hedgeable risks since these risks cannot be hedged in deep and liquid capital markets and are managed, inter alia, by
holding risk capital. Considering the Group as a whole, most residual non-hedgeable risks have a symmetric impact on shareholder value,
ie commensurate upside and downside impacts, with the exception of operational risk.
The CNHR is calculated using a cost of capital approach, ie it is determined as the present value of capital charges for all future non-
hedgeable risk capital requirements until the liabilities have run off. The capital charge in each year is the product of the projected expected
non-hedgeable risk capital held after allowance for some diversification benefits and the cost of capital charge. The cost of capital charge
therefore represents the return above the risk free reference rates that the market is deemed to demand for providing this capital.
The residual non-hedgeable risk capital measure is determined using an internal capital model based on appropriate shock scenarios
consistent with a 99.5% confidence level over a one-year time horizon, using the same approach when calculating economic capital at a
99.93% confidence level. The internal capital model makes allowance for certain management actions, such as reductions in bonus rates,
where deemed appropriate. The residual non-hedgeable risk capital makes an allowance for non-linearities between financial and
non-hedgeable risks.
The following allowance is made for diversification benefits in determining the residual non-hedgeable risk capital at a business unit level:
■ Diversification benefits within the non-hedgeable risks of the covered business are allowed for
■ No allowance is made for diversification benefits between hedgeable and non-hedgeable risks of the covered business
■ No allowance is made for diversification benefits between covered and non-covered business.
A cost of capital charge of 2.0% has been applied to residual symmetric and asymmetric non-hedgeable capital at a business unit level over
the life of the contracts. This rate is derived by considering a market-based view of required return on equity for the covered business, and then
deducting risk-free investment returns, frictional costs and an allowance for franchise value. This translates into an equivalent cost of capital
rate of approximately 2.4% being applied to the Group diversified capital required in respect of such non-hedgeable risks.
231
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials A: MCEV policies continued
a2: Methodology continued
(j) Participating business
For participating business in Emerging Markets and Old Mutual Bermuda, the method of valuation makes assumptions about future bonus
rates and the determination of profit allocation between policyholders and shareholders. These assumptions are made on a basis consistent
with other projection assumptions, especially the projected future risk free investment returns, established Company practice (with due
consideration of the PPFM for South African business), past external communication, any pay-out smoothing strategy, local market practice,
regulatory/contractual restrictions and bonus participation rules.
Where current benefit levels are higher than can be supported by the existing fund assets together with projected investment returns,
a downward ‘glide path’ is projected in benefit levels so that the policyholder fund would be exhausted on payment of the last benefit.
(k) Valuation of assets and treatment of unrealised losses
The market values of assets, where quoted in deep and liquid markets, are based on the bid price on the reporting date. Unquoted assets
are valued according to IFRS and marked to model.
No smoothing of market values or unrealised gains/losses is applied.
(l) Asset mix
The time value of financial options and guarantees and PVFP (where relevant) is calculated with reference to assets that are projected using the
actual asset allocation of the policyholder funds at the reporting date. However, if the current asset mix is materially different to the long-term
strategic asset allocation as a result of market movements, projected assets are assumed to revert to the long-term strategic asset allocation in
the short- to medium-term as appropriate.
(m) Consolidation adjustments
The MCEV result split by business unit takes account of both sides of any loan arrangements between Group companies, with the Group effect
included in net other business.
(n) Look through principle
PVFP and value of new business cash flow projections look through and include the profits/losses of owned service companies, eg distribution
and administration, related to the management of the covered business. Any profit margins that are included in investment management fees
payable by the life assurance companies to the asset management subsidiaries have not been included in the value of in-force business or the
value of new business on the grounds of materiality.
(o) Taxation
In valuing shareholders’ cash flows, allowance is made in the cash flow projections for taxes in the relevant jurisdiction affecting the covered
business. Tax assumptions are based on best estimate assumptions, applying current local corporate tax legislation and practice together with
known future changes and taking credit for any deferred tax assets.
The value of deferred tax assets is partly recognised in the MCEV. Typically those tax assets are expected to be utilised in future by being offset
against expected tax liabilities that are generated on expected profits emerging from in-force business. MCEV may therefore understate the true
economic value of such deferred tax assets because it does not allow for future new business sales which could affect the utilisation of such assets.
United Kingdom
The Emergency Budget that was held in June 2010 stated that the UK’s mainstream corporation tax rate would be reduced from its current level
of 28% down to 24% in annual 1% steps. Following that, there were further announcements for additional reductions (down to 22%), and
accelerations of these reductions. The reduction to 25%, effective from April 2012, has been allowed for in the December 2011 results. The
December 2012 results allow for an additional 1% reduction to 24%, effective from April 2012 and the further 1% reduction to 23%, effective
from April 2013. This additional 2% reduction amounts to £8 million in the December 2012 results. The impact of the remaining reduction from
23% down to 21%, applicable from April 2014, is expected to be £7 million.
South Africa
A new dividend withholding tax system (replacing the current Secondary Tax on Companies (STC) system) was introduced in South Africa
effective from 1 April 2012. This was reflected in the results at 31 December 2011, ie no allowance was made for future dividend withholding
tax in the MCEV, with the exception of dividend withholding tax on the remittance of dividends to Old Mutual plc, as the actual level of taxation
would depend on the legal status of each shareholder.
Allowance has now been made for dividend withholding tax on dividends earned in the policyholder funds as well as allowing for the increase
in capital gains tax in policyholder funds. The average effective tax rate remains unchanged at 28%.
232
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 (p) Value of debt
Senior and subordinated debt securities are marked to market value (for IFRS reporting, debt is valued at either book value or fair value).
The IFRS value of total debt is £1,570 million (2011: £2,539 million) and MCEV value is £1,607million (2011: £2,515 million). $750 million perpetual
preferred securities were repaid in 2012.
Where either the principal or the coupon of the debt security has been swapped into an alternate currency, the mark to market value of these
derivative instruments of £96 million (2011: £86 million) has not been included in the value of debt; however, it is included in the Net other business
value of £45 million (2011: £175 million) (Adjusted Group MCEV by line of business). Further information relating to the debt securities can be found
in Note E1 in the Notes to the Consolidated Financial Statements.
(q) New business and renewals
The market consistent value of new business (VNB) measures the value of the future profits expected to emerge from all new business sold, and
in some cases from premium increases to existing contracts, during the reporting period after allowance for the time value of financial options
and guarantees, frictional costs and the cost of residual non-hedgeable risks associated with writing the new business.
VNB includes contractual renewal of premiums and recurring single premiums, where the level of premium is predefined and is reasonably
predictable, and changes to existing contracts where there are not variations allowed for in the PVFP. Non-contractual increments are treated
similarly where the volume of such increments is reasonably predictable or likely (eg where premiums are expected to increase in line with
salary or price inflation).
Any variations in premiums on renewal of in-force business from that previously anticipated, including deviations in non-contractual increases,
deviations in recurrent single premiums and repricing of premiums for in-force business, are treated as experience variances or economic
variances on in-force business and not as new business.
VNB is calculated as follows:
■ Economic assumptions at the start of the reporting period are used, except for OMLAC(SA)’s non-profit annuities products where point
of sale assumptions are used
■ Demographic and operating assumptions at the end of the reporting period are used
■ At point of sale and rolled forward to the end of the reporting period
■ Generally using a stand-alone approach unless a marginal approach would better reflect the additional value to shareholders created
through the activity of writing new business
■ Expense allowances include all acquisition expenses, including any acquisition expense overruns. Strategic business development expenses
are excluded
■ Net of tax, reinsurance and non-controlling interests
■ No attribution of any investment and operating variances to VNB
New business margins are disclosed as:
■ The ratio of VNB to the present value of new business premiums (PVNBP); and
■ The ratio of VNB to annual premium equivalent (APE), where APE is calculated as annualised recurring premiums plus 10% of single premiums.
PVNBP is calculated at point of sale using premiums before reinsurance and applying a valuation approach that is consistent with the
calculation of VNB.
(r) Analysis of MCEV earnings
An analysis of MCEV earnings provides a reconciliation of the MCEV for covered business at the beginning of the reporting period and the
MCEV for covered business at the end of the reporting period on a net of taxation basis.
Operating MCEV earnings are generated by the value of new business sold during the reporting period, the expected existing business
contribution, operating experience variances, operating assumption changes and other operating variances:
■ The value of new business includes the impact of new business strain on free surplus that arises, amongst other things, from the impact of
initial expenses and additional required capital that is held in respect of such new business
■ The expected existing business contribution is determined by projecting both actual assets and actual liabilities (including assets backing the
free surplus and required capital) from the start of the reporting period to the end of the reporting period using expected real-world earned
rates of return. The expected existing business contribution is presented in two components:
— Expected earnings on free surplus and required capital and the expected change in VIF assuming that the assets earn the beginning of
period risk free reference rates as well as the deterministic release of the time value of options and guarantees, frictional costs and CNHR;
and
— Additional expected earnings on free surplus and required capital and the additional expected change in VIF as a result of real-world
expected earned rates of return on assets in excess of beginning of period risk free reference rates
■ Transfers from VIF and required capital to free surplus include the release of required capital and modeled profits from VIF into free surplus
in respect of business that was in-force at the beginning of the reporting period, although the movement does not contribute to a change in
the MCEV
233
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials A: MCEV policies continued
a2: Methodology continued
(r) Analysis of MCEV earnings continued
■ Operating experience variances reflect the impact of deviations of the actual operational experience during the reporting period from the
expected operational experience. It is analysed before operating assumption changes, ie such variances are assessed against opening
operating assumptions, and reflects the total impact of in-force and new business variances
■ Operating assumption changes incorporate the impact of changes to operating assumptions from those assumed at the beginning of the
reporting period to those assumed at the end of the reporting period. As VNB is calculated using operating assumptions at the end of the
reporting period, this impact only relates to the value of in-force business at the end of the reporting period that was also in-force at the
beginning of the reporting period
■ Other operating variances include model improvements, changes in methodology and the impact of certain management actions,
such as a change in the asset allocation backing required capital
■ Total MCEV earnings also include economic variances and other non-operating variances:
— Economic variances incorporate the impact of changes in economic assumptions from the beginning of the reporting period to the end
of the reporting period (eg different opening and closing interest rates and equity volatility, increases in equity market values during the
period) as well as the impact on earnings resulting from actual returns on assets being different to the expected returns on those assets as
reflected in the expected existing business contribution. It therefore also includes the impact of economic variances in the reporting period
on projected future earnings
— Other non-operating variances include the impact of changes in mandatory local regulations and legislative changes in taxation.
An analysis of MCEV earnings requires non-operating closing adjustments in respect of exchange rate movements and capital transfers such
as those in respect of payment of dividends and acquiring/divesting businesses.
Return on MCEV for covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in local currency,
except for Old Mutual Wealth, core covered business and total covered business where the calculations are performed in sterling.
The anticipated expected existing business contribution for the 12 months following the year ended 31 December 2012 (at the reference rate as
well as in excess of the reference rate) is provided to assist users of the MCEV supplementary information in forecasting operating MCEV
earnings. Note that for comparability against current year earnings, the average exchange rates over 2012 are used. Therefore the expected
existing business contribution for the financial year ending 31 December 2013 ultimately reflected in the 2013 financial statements may differ
from these results.
(s) Group MCEV presentation
Presentation of Group MCEV consists of the covered business under the MCEV methodology and the non-covered business valued as the
unadjusted IFRS net asset value, with the exception of US Asset Management that is valued at IFRS NAV, allowing for the value of the loan note
held with Old Mutual plc. A mark to market adjustment is not performed for external borrowings and other items not on a mark to market basis
under IFRS relating to non-covered business.
a3: assumptions
Non-economic assumptions
The appropriate non-economic projection assumptions for future experience (eg mortality, persistency and expenses), are determined using
best estimate assumptions of each component of future cash flows, are specific to the entity concerned and have regard to past, current and
expected future experience where sufficient evidence exists (eg longevity improvements and AIDS-related claims), as derived from both
entity-specific and industry data where deemed appropriate. Material assumptions are actively reviewed by means of detailed experience
investigations and updated, as deemed appropriate, at least annually.
These assumptions are based on the covered business being part of a going concern, although favourable changes in maintenance expenses
such as productivity improvements are generally not included beyond what has been achieved by the end of the reporting period, apart from
certain development expenses (described below). Expense assumptions for run-off businesses consider cost reductions in future in line with
management actions that would be taken as in-force volumes decrease.
The management expenses attributable to life assurance business have been analysed between expenses relating to the acquisition of new
business, maintenance of in-force business (including investment management expenses) and development projects.
■ All expected maintenance expense overruns affecting the covered business are allowed for in the calculations
■ MCEV makes provision for future development costs and one-off expenses relating to covered business that are known with sufficient
certainty, based on three-year business plans. The provision is reduced to the extent that projects have associated benefits that are directly
quantifiable and are considered to emerge within a reasonable timeframe (eg over the business plan period)
■ Unallocated Group holding company expenses have been included to the extent that they are allocated to the covered business. The table
below shows the future expenses attributable to the long-term business. The allocation of these expenses is based on the proportion that the
management expenses incurred by the covered businesses bears to the total management expenses incurred by the Group.
234
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 In line with legislation in Germany, a specified proportion of miscellaneous profits is shared with policyholders. The revenue on in-force
business can be reduced by various expense items incurred in any year. As such, in the 31 December 2011 VIF calculation, Skandia Leben
(Germany) made allowance for the acquisition expenses in relation to the new business written over the next three years when setting the best
estimate assumptions for the profit to be shared with policyholders in future years. As the business has been placed in run-off during 2012,
acquisition expenses have not been incorporated into profit-sharing assumptions at 31 December 2012.
proportion of Group holding company expenses attributable to long-term business
Emerging Markets
Old Mutual Wealth
Old Mutual Bermuda1
Nordic
total
at
31 December
2012
%
At
31 December
2011
18
9
n/a
n/a
27
17
8
n/a
3
28
1 Based on materiality, no Group holding expenses are allocated to Old Mutual Bermuda.
Economic assumptions
An active basis is applied to set pre-tax investment and economic assumptions to reflect the economic conditions prevailing on the reporting date.
Economic assumptions are set consistently, for example future bonus rates are set at levels consistent with the investment return assumptions.
Under a market consistent valuation, economic assumptions are determined such that projected cash flows are valued in line with the prices
of similar cash flows that are traded on the capital markets. Thus, risk-free cash flows are discounted at a risk-free reference rate and equity
cash flows at an equity rate. In practice for the PVFP, where cash flows do not depend on or vary linearly with market movements, a certainty
equivalent method is used which assumes that actual assets held earn, before tax and investment management expenses, risk-free reference
rates (including any liquidity adjustment) and all the cash flows are discounted using risk-free reference rates (including any liquidity adjustment)
which are gross of tax and investment management expenses. The deterministic certainty equivalent method is purely a valuation technique
and over time the expectation is still that risk premiums will be earned on assets such as equities and corporate bonds.
(a) Risk-free reference rates and inflation
The risk-free reference rates, reinvestment rates and discount rates are determined with reference to the swap yield curve appropriate to the
currency of the cash flows. For Europe the swap yield curve is obtained from Bloomberg. For Old Mutual Bermuda the swap yield curve is
sourced from a third-party market consistent asset model that is used to generate the economic scenarios that are required to value the time
value of financial options and guarantees. For Emerging Markets the swap yield curve is sourced internally (using market data provided by the
Bond Exchange of South Africa) and it is checked for reasonability relative to the Bloomberg swap yield curve.
At 31 December 2012, no adjustments are made to swap yields to allow for liquidity premiums or credit risk premiums, apart from a liquidity
premium adjustment to OMLAC(SA)’s immediate annuity business and fixed bond businesses. A liquidity premium adjustment is applied to
OMLAC(SA)’s fixed bond business as OMLAC(SA) holds a portfolio of non-government bonds which have a market yield in excess of the
risk-free rate and the duration of the asset portfolio and the liability duration are a good match (meaning the asset portfolio is held to maturity).
Cash flows on this product are also predictable and the company has adequate liquidity to withstand a substantial increase in lapses at all
durations without having to sell bonds which further strengthens the case for applying a liquidity premium.
It is the directors’ view that a proportion of non-government bond spreads at 31 December 2012 is attributable to a liquidity premium rather
than only to credit and default allowances and that returns in excess of swap rates can be achieved, rather than entire spreads being lost to
worsening default experience. For OMLAC(SA)’s immediate annuity business the currency, credit quality and duration of the actual bond
portfolios were considered and adjusted risk-free reference rates were derived at 31 December 2012 by adding 50bps of liquidity premium
for this business (2011: 50bps) to the swap rates used for setting investment return and discounting assumptions. For OMLAC(SA)’s fixed bond
products 45bps of liquidity premium was added to the swap rates (2011: 50bps). These adjustments reflect the liquidity premium component
in non-government bond spreads over swap rates that is expected to be earned on the portfolios. In deriving the liquidity premiums at
31 December 2012, we compared the yields of similar durations on South African government bonds and bonds issued by state-owned
enterprises. At those durations where swap yields are not available, eg due to lack of a sufficiently liquid or deep swap market, the swap curve
is extended using appropriate interpolation or extrapolation techniques.
The risk-free reference spot yields (excluding any applicable liquidity adjustments) at various terms for each of the significant regions are
provided in the table below. The risk-free reference spot yield curve has been derived from mid-swap rates at the reporting date.
Expense inflation rates have been derived by comparing real rates of return against nominal risk-free rates for each territory, with adjustments
for higher business unit specific inflation where applicable.
235
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials A: MCEV policies continued
a3: assumptions continued
risk-free reference spot yields (excluding any applicable liquidity adjustments)
at 31 December 2012
1 year
5 years
10 years
20 years
At 31 December 2011
1 year
5 years
10 years
20 years
pounDS
Eur
uSD
Zar
0.7
1.0
1.9
2.9
1.4
1.6
2.4
3.0
0.3
0.8
1.6
2.2
1.4
1.7
2.4
2.7
0.3
0.9
1.9
2.8
0.7
1.2
2.1
2.6
5.1
6.0
7.1
7.5
5.7
7.1
8.1
8.1
%
SEK
n/a
n/a
n/a
n/a
2.1
2.3
2.5
2.1
(b) Volatilities and correlations
Where cash flows contain financial options and guarantees that do not move linearly with market movements, asset cash flows are projected
and all cash flows are discounted using risk-neutral stochastic models. These models project the assets and liabilities using a distribution of asset
returns where all asset types, on average, earn the same risk-free reference rates.
Apart from the risk-free reference yields specified above, other key economic assumptions for the calibration of economic scenarios include the
implied volatilities for each asset class and correlations of investment returns between different asset classes. For Old Mutual Bermuda, implied
volatilities and correlations are determined for each global equity and bond index modeled.
The volatility assumptions for the calibration of economic scenarios that are used in the stochastic models are, where possible, based on those
implied from appropriate derivative prices (such as equity options or swaptions in respect of guarantees that are dependent on changes in
equity markets and interest rates respectively) as observed on the valuation date. However, historic implied and historic observed volatilities of
the underlying instruments and expert opinion are considered where there are concerns over the depth or liquidity of the market. Where strict
adherence to the above is not possible, for example where markets only exist at short durations such as the swaption market in South Africa,
interpolation or extrapolation techniques, and where appropriate, historical data are used to derive volatility assumptions for the full Term structure
of the liabilities. Correlation assumptions between asset classes that are used in stochastic models are based on an assessment of historic
relationships. Where historic data is used in setting volatility or correlation assumptions, a suitable time period is considered for analysing historic
data including consideration of the appropriateness of historical data where economic conditions were materially different to current conditions.
(c) Exchange rates
All MCEV figures are calculated in local currency and translated to pounds using the appropriate exchange rates as detailed in Note A1 of the
Consolidated Financial Statements.
(d) Expected asset returns in excess of the risk-free reference rates
The expected asset returns in excess of the risk free reference rates have no bearing on the calculated MCEV other than the calculation of the
expected existing business contribution in the analysis of MCEV earnings. Real-world economic assumptions are determined with reference to
one-year forward risk-free reference rates applicable to the currency of the liabilities at the start of the reporting period. All other economic
assumptions, for example future bonus rates, are set at levels consistent with the real-world investment return assumptions.
Equity and property risk premiums incorporate both historical relationships and the directors’ view of future projected returns in each region
over the analysis period. Pre-tax real-world economic assumptions are determined as follows:
■ The equity risk premium is 3.7% for Africa (2011: 3.5%) and 3% for Europe
■ The cash return equals the one year risk free reference rate for all regions
■ The property risk premium is 1.5% in Africa and 2% in Europe
■ Returns on corporate bonds reference actual yields from assets held
■ No risk premium is assumed for Old Mutual Bermuda’s variable annuity policyholder asset portfolios.
236
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 B: Segment information
b1: Components of Group MCEV and adjusted Group MCEV
adjusted net worth attributable to ordinary equity holders of the parent
Equity
Adjustment to IFRS net asset value
Adjustment to remove perpetual preferred callable securities
Value of in-force business
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
Group MCEV
adjustments to bring Group investments to market value
Adjustment to bring listed subsidiary (Nedbank) to market value
Adjustment for value of own shares in ESOP schemes1
Adjustment for present value of Black Economic Empowerment scheme deferred consideration
Adjustment to bring external debt to market value
adjusted Group MCEV
Group MCEV value per share (pence)
adjusted Group MCEV per share (pence)
number of shares in issue at the end of the financial period less treasury shares – millions
return on Group MCEV (roEV) per annum from core operations
Return on Group MCEV (RoEV) per annum from continuing non-core operations
Return on Group MCEV (RoEV) per annum from discontinued operations
return on Group MCEV (roEV2) per annum
at
31 December
2012
Notes
£m
At
31 December
2011
C4
B3
5,791
7,833
(1,360)
(682)
3,401
3,946
(53)
(221)
(271)
5,193
8,488
(2,607)
(688)
4,535
5,248
(136)
(243)
(334)
9,192
9,728
1,255
126
245
(37)
655
117
270
24
10,781
10,794
187.9
220.3
4,893
6.8%
1.0%
0.3%
8.1%
174.9
194.1
5,562
8.8%
0.5%
1.4%
10.7%
1
Includes adjustment for value of excess own shares in employee share scheme trusts. The movement in value between 31 December 2011 and 31 December 2012 is the net
effect of the increase in the Old Mutual plc share price, the reduction in excess own shares following employee share grants during the period and the reduction in overall
shares held due to exercises of rights to take delivery of, or net settle, share grants during the financial period.
2 The RoEV is calculated as the adjusted operating Group MCEV earnings after tax and non-controlling interests of £789 million (2011: £1,055 million) divided by the opening
Group MCEV.
237
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials B: Segment information continued
b2: adjusted operating MCEV earnings for the covered business
year ended 31 December 2012
adjusted operating Group MCEV earnings
before tax
Tax on adjusted operating Group MCEV earnings
adjusted operating Group MCEV earnings
after tax
Year ended 31 December 2011
adjusted operating Group MCEV earnings
before tax
Tax on adjusted operating Group MCEV earnings
adjusted operating Group MCEV earnings
after tax
total
covered
business
Core
covered
business
Emerging
Markets
old Mutual
Wealth
non-core
covered
business
£m
Discontinued
covered
business
571
(118)
453
454
(118)
336
459
(131)
328
(5)
13
8
99
–
99
18
–
18
Total
covered
business
Core
covered
business
Emerging
Markets
Old Mutual
Wealth
Non-core
covered
business
£m
Discontinued
covered
business
918
(191)
727
714
(162)
552
468
(119)
349
246
(43)
203
48
(1)
47
156
(28)
128
b3: Components of MCEV of the covered business
at 31 December 2012
adjusted net worth
Free surplus
Required capital
Value of in-force
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
MCEV
At 31 December 2011
adjusted net worth
Free surplus
Required capital
Value of in-force
Present value of future profits
Additional time value of financial options and guarantees
Frictional costs
Cost of residual non-hedgeable risks
MCEV
total
covered
business
Core
covered
business
Emerging
Markets1
old Mutual
Wealth
non-core
covered
business
£m
Discontinued
covered
business
2,964
925
2,039
3,401
3,946
(53)
(221)
(271)
2,284
678
1,606
3,456
3,950
(14)
(220)
(260)
1,818
506
1,312
1,478
1,828
–
(207)
(143)
466
172
294
1,978
2,122
(14)
(13)
(117)
6,365
5,740
3,296
2,444
680
247
433
(55)
(4)
(39)
(1)
(11)
625
–
–
–
–
–
–
–
–
–
Total
covered
business
Core
covered
business
Emerging
Markets1
Old Mutual
Wealth
Non-core
covered
business
£m
Discontinued
covered
business
2,676
680
1,996
4,536
5,248
(136)
(243)
(333)
7,212
2,204
522
1,682
3,509
4,001
(14)
(236)
(242)
5,713
1,768
400
1,368
1,399
1,740
–
(218)
(123)
3,167
436
122
314
2,110
2,261
(14)
(18)
(119)
2,546
187
–
187
(121)
36
(122)
(2)
(33)
66
285
158
127
1,148
1,211
–
(5)
(58)
1,433
1 The required capital in respect of Emerging Markets is partially covered by the market value of the Group’s investments in banking and general insurance in South Africa.
On consolidation these investments are shown separately.
238
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 b4: analysis of covered business MCEV earnings (after tax)
total covered business
opening MCEV
New business value
Expected existing business contribution
(reference rate)
Expected existing business contribution
(in excess of reference rate)
Transfers from VIF and required capital
to free surplus
Experience variances
Assumption changes
Other operating variance
operating MCEV earnings
Economic variances
Other non-operating variance
total MCEV earnings
Closing adjustments
Capital and dividend flows
Foreign exchange variance
MCEV of sold business
Closing MCEV
year ended 31 December 2012
Year ended 31 December 2011
free
surplus
required
capital
adjusted
net
worth
Value of
in-force
MCEV
Free
surplus
Required
capital
Adjusted
net worth
Value of
in-force
MCEV
£m
680
1,996
2,676
4,536
7,212
(293)
163
(130)
327
197
20
3
71
29
91
156
247
32
49
695
(216)
479
(479)
81
–
9
34
(115)
453
520
(47)
926
17
(7)
18
75
3
240
318
3
27
(8)
494
261
(44)
711
6
7
(107)
(41)
259
(3)
215
(275)
(423)
(1,350)
(1,773)
(3)
(145)
(127)
23
1
24
(199)
(139)
(338)
(247)
(1,212)
(1,459)
925
2,039
2,964
3,401
6,365
(14)
34
(26)
419
258
(284)
393
(148)
26
(54)
(120)
507
(444)
17
7
943
10
23
188
744
(221)
32
555
(382)
(243)
(75)
(64)
680
2,844
3,351
4,164
7,515
187
(257)
490
233
65
34
(236)
30
4
(205)
(121)
(22)
1
(142)
(706)
55
(312)
(449)
82
41
707
40
27
(17)
623
(243)
33
413
(1,088)
(188)
(387)
(513)
179
261
87
128
(707)
111
1
(57)
104
(214)
93
(17)
389
–
(306)
695
–
151
28
(74)
727
(457)
126
396
(699)
(188)
(693)
182
1,996
2,676
4,536
7,212
return on MCEV (roEV)% per annum
6.3%
Return on MCEV for total covered business is calculated as the operating MCEV earnings after tax divided by opening MCEV in sterling.
9.7%
£m
year ended 31 December 2012
Year ended 31 December 2011
adjusted net
worth
Value of
in-force
MCEV
Adjusted net
worth
Value of in-force
MCEV
Experience variances
Persistency
Risk
Expenses
Other
assumption changes
Persistency
Risk
Expenses
Other
3
51
52
(91)
(9)
27
12
13
12
(10)
6
10
–
11
(15)
7
(25)
37
(3)
(2)
9
61
52
(80)
(24)
34
(13)
50
9
(12)
40
20
43
(44)
21
27
21
–
(7)
13
111
84
4
13
10
1
40
8
(99)
52
151
104
47
(31)
31
28
61
8
(106)
65
£m
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
year ended 31 December 2013
free
surplus
required
capital
adjusted
net worth
Value of
in-force
17
5
55
25
72
30
143
45
MCEV
215
75
239
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials B: Segment information continued
b5: analysis per business unit
opening MCEV
New business value
Expected existing business contribution (reference rate)
Expected existing business contribution
(in excess of reference rate)
Experience variances
Assumption changes
Other operating variance
operating MCEV earnings
Economic variances
Other non-operating variance
total MCEV earnings
Closing adjustments
Capital and dividend flows
Foreign exchange variance
MCEV of acquired/sold business
Closing MCEV
return on MCEV (roEV)% per annum
year ended 31 December 2012
£m
total
covered
business
7,212
Core
covered
business
5,713
Emerging
Markets
3,167
old Mutual
Wealth
2,546
197
247
81
9
34
(115)
453
520
(47)
926
(1,773)
24
(338)
(1,459)
6,365
6.3%
197
239
55
(48)
5
(112)
336
403
(29)
710
(683)
(336)
(322)
(25)
135
193
32
(29)
34
(37)
328
281
(26)
583
(454)
(147)
(307)
–
62
46
23
(19)
(29)
(75)
8
122
(3)
127
(229)
(189)
(15)
(25)
5,740
5.9%
3,296
10.7%
2,444
0.3%
non-core
covered
business
Discontinued
covered
business
66
–
8
26
39
29
(3)
99
117
–
216
343
360
(17)
–
625
154.0%
1,433
–
–
–
18
–
–
18
–
(18)
–
(1,433)
–
1
(1,434)
–
1.3%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart
from total covered and core covered business, which are calculated in sterling. Discontinued covered business relates to Nordic.
transfers from Vif and required capital to free surplus
total
covered
business
(479)
(216)
695
Core
covered
business
(540)
(190)
730
Emerging
Markets
old Mutual
Wealth
(220)
(153)
373
(320)
(37)
357
total
covered
business
Core
covered
business
Emerging
Markets
old Mutual
Wealth
9
61
52
(80)
(24)
34
(13)
50
9
(12)
(48)
22
52
(82)
(40)
5
(32)
50
(11)
(2)
(29)
(1)
46
(41)
(33)
34
(6)
49
(9)
–
(19)
23
6
(41)
(7)
(29)
(26)
1
(2)
(2)
non-core
covered
business
£m
Discontinued
covered
business
61
(26)
(35)
–
–
–
non-core
covered
business
£m
Discontinued
covered
business
39
39
–
2
(2)
29
19
–
20
(10)
18
–
–
–
18
–
–
–
–
–
year ended 31 December 2012
Transfer from value of in-force
Transfer from required capital
Transfer to free surplus
year ended 31 December 2012
Experience variances
Persistency
Risk
Expenses
Other
assumption changes
Persistency
Risk
Expenses
Other
240
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 opening MCEV
New business value
Expected existing business contribution (reference rate)
Expected existing business contribution
(in excess of reference rate)
Experience variances
Assumption changes
Other operating variance
operating MCEV earnings
Economic variances
Other non-operating variance
total MCEV earnings
Closing adjustments
Capital and dividend flows
Foreign exchange variance
MCEV of acquired/sold business
Closing MCEV
return on MCEV (roEV)% per annum
Year ended 31 December 2011
Total
covered
business
7,515
Core
covered
business
5,913
Emerging
Markets
3,313
Old Mutual
Wealth
2,600
233
261
128
151
28
(74)
727
(457)
126
396
(699)
(188)
(693)
182
177
211
57
130
40
(63)
552
(7)
89
634
(834)
(177)
(657)
–
99
174
30
102
6
(62)
349
32
93
474
(620)
12
(632)
–
7,212
9.7%
5,713
9.3%
3,167
11.9%
78
37
27
28
34
(1)
203
(39)
(4)
160
(214)
(189)
(25)
–
2,546
7.8%
Non-core
covered
business
287
–
8
38
24
(8)
(15)
47
(261)
–
(214)
(7)
–
(7)
–
66
17.0%
£m
Discontinued
covered
business
1,315
56
42
33
(3)
(4)
4
128
(189)
37
(24)
142
(11)
(29)
182
1,433
8.5%
Return on MCEV is calculated as the operating MCEV earnings after tax divided by opening MCEV. This is calculated in local currency, apart
from total covered and core covered business, which are calculated in sterling. Discontinued covered business RoEV relates to Nordic.
Transfers from VIF and required capital to free surplus
Year ended 31 December 2011
Transfer from value of in-force
Transfer from required capital
Transfer to free surplus
Year ended 31 December 2011
Experience Variances
Persistency
Risk
Expenses
Other
assumption changes
Persistency
Risk
Expenses
Other
Total
covered
business
(707)
(236)
943
Total
covered
business
151
104
47
(31)
31
28
61
8
(106)
65
Core
covered
business
(569)
(179)
748
Core
covered
business
130
79
46
(24)
29
40
47
8
(80)
65
Emerging
Markets
Old Mutual
Wealth
(209)
(150)
359
(360)
(29)
389
Non-core
covered
business
(9)
(57)
66
£m
Discontinued
covered
business
(129)
–
129
Emerging
Markets
102
56
38
(9)
17
6
55
–
(49)
–
Old Mutual
Wealth
Non-core
covered
business
£m
Discontinued
covered
business
28
23
8
(15)
12
34
(8)
8
(31)
65
24
22
–
3
(1)
(8)
20
–
(26)
(2)
(3)
3
1
(10)
3
(4)
(6)
–
–
2
241
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials B: Segment information continued
b5: analysis per business unit continued
results highlights
Core covered business
■ Strong value of new business growth in Emerging Markets due to good volumes and an improvement in the mix of business leading
to higher margins
■ A significant portion of expense losses include one-off non-development costs of £(44) million incurred in Emerging Markets and
Old Mutual Wealth
■ Favourable equity and bond market performance has led to positive economic variances in Emerging Markets and Old Mutual Wealth
■ The 10% depreciation of the rand against sterling over 2012 has led to foreign exchange translation losses in MCEV closing adjustments
■ A significant portion of the continental European business has now closed to new business, with resulting changes to expense, lapse and
profit-sharing assumptions (German PHP business) reducing the MCEV now recognised for these businesses.
Non-core covered business (Old Mutual Bermuda)
■ Very favourable persistency experience on the Old Mutual Bermuda variable annuity book of business, leading to positive assumption
changes
■ Capital has been transferred to Old Mutual Bermuda to meet the enhanced capital requirements of the Bermuda Monetary Authority (BMA)
■ The expiration of the five-year guarantees, higher than expected lapses, lapse assumption changes and favourable market performance
has led to a significant reduction in variable annuity guarantee reserves.
new business
Emerging Markets: VNB increased by 36% due to higher volumes and margins (mix of business, repricing of certain products and favourable
assumption changes), partially offset by the rand depreciation over 2012. There have been strong recurring premium sales in Mass Foundation
Cluster and single premium annuity sales in Corporate segment. However, covered single premium savings sales in Retail Affluent and
Corporate segment have lagged in 2012 although non-covered single premium savings sales have improved significantly.
Old Mutual Wealth: Following the cessation of significant parts of uneconomic product lines as a result of business restructuring initiatives,
there have been lower covered sales in the UK. International sales were affected by regulatory changes that were overcome in the fourth
quarter of 2012.
transfers from the value of in-force business
Old Mutual Wealth: Lower expected transfers in 2012 are mainly as a result of the run-off of closed books and the sale of the Finnish business.
Non-core covered (Old Mutual Bermuda): The large negative expected transfer in 2012 is a result of the anticipated loss in fee income from the
significant number of variable annuity surrenders post the five-year guarantee top-up point and the anticipated amortisation of deferred
acquisition costs resulting from the business run-off.
Experience variances and operating assumption changes
Emerging Markets: Positive risk experience from Retail Affluent and Mass Foundation Cluster products continued in 2012, with positive
assumption changes of £49 million reflecting some of this experience. Other experience losses mainly relate to higher than anticipated taxation
in 2012. Experience variances also include an investment of £18 million in the development of our franchise in African countries and Mexico,
as well as the development cost of new strategic capabilities, and also expenses of a one-off nature (including IT project expenditure) of
£28 million.
Old Mutual Wealth: The positive persistency experience is mainly a result of a lower than anticipated number of surrenders in the UK Legacy
savings business in the run-up to the Retail Distribution Review (RDR). Negative persistency assumption changes relate mainly to a reduction in
anticipated lapses on protection products at later durations of £(11) million and the anticipated increase in surrenders of products in Germany
and Austria of £(7) million, consistent with recent experience. Expense losses include one-off restructuring costs of £16 million as well as
investments of £19 million in development initiatives in Platform and International businesses.
Non-core covered (Old Mutual Bermuda): Positive persistency profits reflect better than expected 5-year anniversary surrender experience on
variable annuity products. Non-Hong Kong Universal Guarantee Option (UGO) business experienced a 79% surrender rate and the Hong
Kong UGO business experienced a 63% lapse rate since these businesses entered the top-up period. In light of this experience, surrender
assumptions have been increased for policies that are yet to reach their five-year anniversary (£20 million impact). Positive expense assumption
changes of £19 million reflect reduced aggregate expenses needed to meet the remaining obligations of the business. Other assumption
changes of £(10) million are mainly driven by a reduction in rebate income as underlying client portfolios reach sub-scale levels.
Discontinued (Nordic): Experience variances reflect accrued IFRS profits during the year prior to the sale of the business.
242
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 other operating variances
Emerging Markets: Other operating variances mainly reflect the impact of a management decision to utilise the future profit stream
arising from unclaimed benefits to fund an advisor training academy, and to enhance the surrender values on old generation reversionary
bonus policies.
Old Mutual Wealth: Other operating variances include the £(73) million impact of the management action to place the German and Austrian
businesses into run-off. Setting expense assumptions on a run-off basis for these businesses reduced MCEV by £(26) million and a change in
profit-sharing assumptions for the German PHP business reduced MCEV by £(47)million. Variances also include the release of development
provisions of £17 million (change in methodology to recognise project benefits as well as costs where benefits are directly quantifiable and
emerge within a reasonable timeframe) and CNHR modeling changes.
Economic variances
Emerging Markets: Significant positive economic variances have emerged from better than expected investment returns (favourable equity,
bond and credit market performance), together with the reduction in the swap yield curve, which has increased the VIF.
Old Mutual Wealth: Significantly positive economic variances have emerged from better than expected policyholder fund performance over
2012 due to better than expected equity and bond market returns.
Non-core covered (Old Mutual Bermuda): The positive variance resulting in significantly lower variable annuity guarantee reserves is mainly
due to positive equity market performance, and reduced volatilities, partially offset by lower short- to medium-term interest rates.
other non-operating variances
Emerging Markets: Other non-operating variances consist mainly of modeling changes to incorporate the new South African dividend
withholding tax regime, and higher capital gains tax, in the calculation of policyholder investment returns in MCEV models.
Closing adjustments
Emerging Markets: Capital and dividend flows include the net impact of dividends paid of £(130) million, the purchase of Africa operations
from Old Mutual plc of £(92) million, the transfer of net asset value of the Zimbabwe and Namibian holding companies from non-covered
business of £135 million and the Zimbabwe indigenisation costs of £(34) million. The negative foreign exchange variance reflects the
10% depreciation of the rand over the period (pounds/ZAR exchange rate increased from 12.56 at 31 December 2011 to 13.77 at
31 December 2012).
Old Mutual Wealth: Closing adjustments include the impact of the sale of the Finnish business £(25) million.
Non-core covered (Old Mutual Bermuda): The positive capital and dividend flows of £360 million include £352 million relating to the transfer of
capital to this business (in the form of additional Old Mutual plc loan notes and other assets) to enable it to meet the new enhanced capital
requirements of the Bermuda Monetary Authority (BMA).
243
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials C: Other key performance information
C1: Value of new business (after tax)
The tables below set out the regional analysis of the value of new business (VNB) after tax. New business profitability is measured by both the
ratio of the VNB to the present value of new business premiums (PVNBP) as well as to the annual premium equivalent (APE), and shown under
PVNBP margin and APE margin below. APE is calculated as recurring premiums plus 10% of single premiums. Old Mutual Bermuda is excluded
from the tables below as it is closed to new business.
year ended 31 December 2012
Core covered business
Emerging Markets
Old Mutual Wealth
Discontinued covered business
total covered business
Year ended 31 December 2011
Core covered business
Emerging Markets
Old Mutual Wealth
Discontinued covered business
total covered business
annualised
recurring
premiums
Single
premiums
517
370
147
n/a
517
Annualised
recurring
premiums
569
363
206
153
722
5,953
1,321
4,632
n/a
5,953
Single
premiums
6,211
1,441
4,770
753
6,964
pVnbp
capitalisation
factors1
5.2
5.4
4.8
n/a
5.2
PVNBP
capitalisation
factors1
5.1
5.1
5.1
3.9
4.8
pVnbp
8,665
3,331
5,334
n/a
8,665
PVNBP
9,113
3,295
5,818
1,347
10,460
apE
1,112
502
610
n/a
1,112
APE
1,189
506
683
229
1,418
1 The PVNBP capitalisation factors are calculated as follows: (PVNBP – single premiums)/annualised recurring premiums.
pVnbp
margin
2.3%
4.1%
1.2%
n/a
2.3%
£m
apE margin
18%
27%
10%
n/a
18%
£m
PVNBP
margin
APE margin
1.9%
3.0%
1.3%
4.2%
2.2%
15%
20%
11%
25%
16%
Vnb
197
135
62
n/a
197
VNB
177
99
78
56
233
The VNB for Old Mutual Wealth in December 2012 has been calculated after the reallocation of certain development costs from acquisition
expenses to expense variances. If December 2011 VNB was calculated on the same basis, it would have been £85 million.
Additional new business written in the Group
The value of new individual unit trust-linked retirement annuities and pension fund asset management business written by the Emerging Markets
long-term business of £1,093 million (2011: £884 million) is excluded as the profits on this business arise in the asset management business. The
value of new business also excludes premium increases arising from indexation arrangements in respect of existing business, as these are
already included in the value of in-force business.
The value of new institutional investment platform pensions business written in Old Mutual Wealth of £736 million (2011: £704 million) is
excluded as this is more appropriately classified as unit trust business.
New business single premiums of £37 million (2011: £31 million), annualised recurring premiums of £17 million (2011: £14 million), and APE of
£21 million (2011: £17 million), in respect of the life business in Kenya, Malawi, Nigeria, Swaziland and Zimbabwe, have been excluded from the
above tables, as no VNB and PVNBP calculations have been performed for these businesses.
244
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 C2: adjustments applied in determining total Group MCEV earnings before tax
year ended 31 December 2012
Year ended 31 December 2011
Covered
business
MCEV
non-
covered
business
ifrS
total
Group
MCEV
Covered
business
MCEV
Non-
covered
business
IFRS
Total
Group
MCEV
£m
income/(expense)
Goodwill impairment and amortisation of non-covered
business acquired intangible assets and impact of
acquisition accounting
Economic variances
Other non-operating variances
Acquired/divested business1
Other Group adjustments related to Nordic disposal
Adjusted Group MCEV uplift from sale of Nordic
Dividends declared to holders of perpetual preferred
callable securities
Premium paid on early repayment of senior debt
Adjusting items relating to US Asset Management equity
plans and non-controlling interests
Fair value (losses)/gains on Group debt instruments
adjusting items
Adjusting items from continuing operations
Adjusting items from discontinued operations
total MCEV adjusting items
–
657
(56)
–
(14)
–
–
–
–
–
587
605
(18)
587
(7)
(25)
–
(12)
414
201
42
(71)
(5)
(57)
480
(119)
599
480
(7)
632
(56)
(12)
400
201
42
(71)
(5)
(57)
1,067
486
581
1,067
–
(554)
22
–
–
–
–
–
–
–
(532)
(378)
(154)
(532)
(283)
(28)
–
182
–
–
44
–
(3)
22
(66)
(59)
(7)
(66)
1
In December 2011, this related to the non-covered businesses in Kenya, Malawi, Nigeria, Swaziland and Zimbabwe that were included for the first time.
C3: other movements in ifrS net equity impacting Group MCEV
(283)
(582)
22
182
–
–
44
–
(3)
22
(598)
(437)
(161)
(598)
£m
fair value movements1
Net investment hedge
Currency translation differences/exchange differences
on translating foreign operations
Aggregate tax effects of items taken directly to or
transferred from equity
Other movements2
net income recognised directly into equity
Capital and dividend flows for the year3
Inclusion of other African life businesses
Net purchase of treasury shares
Shares issued in lieu of cash dividends
Other shares issued
Change in share-based payment reserve
other movements in net equity
year ended 31 December 2012
Year ended 31 December 2011
Covered
business
MCEV
–
–
non-
covered
business
ifrS
(328)
160
total
Group
MCEV
(328)
160
(338)
(677)
(1,015)
–
(1,459)
(1,797)
24
–
–
–
–
–
(1,773)
9
1,459
623
(1,238)
–
8
–
33
62
(512)
9
–
(1,174)
(1,214)
–
8
–
33
62
(2,285)
Covered
business
MCEV
Non-
covered
business
IFRS
–
–
(693)
–
182
(511)
(257)
69
–
–
–
–
(699)
24
28
(498)
11
128
(307)
(8)
–
(17)
124
10
50
(148)
Total
Group
MCEV
24
28
(1,191)
11
310
(818)
(265)
69
(17)
124
10
50
(847)
1 Fair value movements include realisation of foreign exchange reserve on disposal of £(350) million and a fair value movement of £22 million.
2
The December 2012 amount relates to the transfer of Nordic covered MCEV balance on disposal and the sale of Finnish branch in Old Mutual Wealth. December 2011 reflects
movements in respect of the disposal of US Life.
December 2012 capital and dividend flows from the covered business include the purchase of the Rest of Africa businesses by Emerging Markets from Old Mutual plc and the
capital injection of £352 million into Old Mutual Bermuda. The special dividend of £915 million, paid on 7 June 2012, is included in non-covered business.
3
245
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials C: Other key performance information continued
C4: reconciliation of MCEV adjusted net worth to ifrS net asset value for the covered business
The table below provides a reconciliation of the MCEV adjusted net worth (ANW) to the IFRS net asset value (NAV) for the covered business.
at 31 December 2012
IFRS net asset value1
Adjustment to include long-term business
on a statutory solvency basis
Inclusion of Group equity and debt instruments
held in life funds2
Goodwill
adjusted net worth attributable to ordinary
equity holders of the parent
At 31 December 2011
IFRS net asset value1
Adjustment to include long-term business
on a statutory solvency basis
Inclusion of Group equity and debt instruments
held in life funds2
Goodwill
adjusted net worth attributable to ordinary
equity holders of the parent
total
covered
business
4,288
Core
covered
business
3,580
Emerging
Markets
old Mutual
Wealth
1,275
2,305
(926)
367
(765)
(898)
367
(765)
187
364
(8)
2,964
2,284
1,818
Total
covered
business
5,214
Core
covered
business
3,744
(1,905)
(1,108)
365
(998)
365
(797)
Emerging
Markets
1,230
182
365
(9)
2,676
2,204
1,768
(1,085)
3
(757)
466
Old Mutual
Wealth
2,514
(1,290)
–
(788)
436
non-core
covered
business
£m
Discontinued
covered
business
708
(28)
–
–
680
Non-core
covered
business
201
(14)
–
–
187
–
–
–
–
–
£m
Discontinued
covered
business
1,269
(783)
–
(201)
285
IFRS net asset value is after elimination of inter-company loans.
1
2 A further £(36) million (2011: £(69) million) relates to the non-covered business. This brings the total adjustment to IFRS net asset value to £1,360 million (2011: £2,607 million).
The adjustments to include long-term business on a statutory solvency basis reflect the difference between the net worth of each business on
the statutory basis (as required by the local regulator) and their portion of the Group’s consolidated equity shareholder funds. In South Africa,
these values exclude items that are eliminated or shown separately on consolidation (such as Nedbank and inter-company loans). For some
European countries the value reflected in the adjustment to include long-term business on a statutory solvency basis includes the value of the
deferred acquisition cost asset, which is part of the equity.
The adjustment to include long-term business on a statutory solvency basis includes the following:
■ The excess of the IFRS amount of the deferred acquisition cost (DAC) and value of business acquired (VOBA) assets over the statutory levels
included in the VIF with the exception of the Old Mutual Bermuda business where DAC is an admissible asset under local statutory basis
■ When projecting future profits on a statutory basis, the VIF includes the shareholders’ value of unrealised capital gains. To the extent that
assets in IFRS are valued at market and the market value is higher than the statutory book value, these profits have already been taken into
account in the IFRS equity. For Old Mutual Bermuda business, VIF reflects the impact of amortising DAC allowed under the ANW at
31 December 2011. DAC has been completely written off at 31 December 2012.
246
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 D1: Sensitivity tests
The tables below show the sensitivity of the MCEV, value of in-force business at 31 December 2012 and the value of new business for the year
ended 31 December 2012 to the following:
■ Economic assumptions 100 bps increase/decrease: Increasing/decreasing all pre-tax investment and economic assumptions
(projected investment returns and inflation) by 100 bps, with credited rates and discount rates changing commensurately
■ Equity/property market value 10% increase/decrease: Equity and property market value increasing/decreasing by 10%, with all
pre-tax investment and economic assumptions unchanged
■ 10 bps increase of liquidity spreads: Recognising the present value of an additional 10 bps of liquidity spreads assumed on corporate
bonds over the lifetime of the liabilities, with credited rates and discount rates changing commensurately
■ 25% increase in equity/property and swaption implied volatilities: 25% multiplicative increase in implied volatilities
■ Vnb 10% increase in acquisition expenses: For value of new business, acquisition expenses other than commission and commission
related expenses increasing by 10%, with no corresponding increase in policy charges
■ Vnb on closing economic assumptions: Value of new business calculated on economic assumptions at the end of reporting period
■ nhr capital diversification: Residual non-hedgeable risk capital reduced to incorporate diversification benefits between hedgeable
and non-hedgeable risks for covered business
■ 99.93% confidence level nhr capital: Economic capital for residual non-hedgeable risks calculated assuming a 99.93% confidence
level which is targeted by an internal economic capital model.
For each sensitivity illustrated, all other assumptions have been left unchanged except where they are directly affected by the revised conditions.
Sensitivity scenarios therefore include consistent changes in cash flows directly affected by the changed assumption(s), for example future bonus
participation in changed economic scenarios.
In some jurisdictions the reserving basis that underlies shareholder distributable cash flows is dynamic, and in theory some sensitivities could
change not only future experience but also reserving levels. Modeling of dynamic reserves is extremely complex and the effect on value is
second-order. Therefore, in performing the sensitivities, reserving bases have been kept constant for non-linked business (including non-linked
reserves for linked business) whilst only varying future experience assumptions with similar considerations applying to required capital.
However the sensitivities for South Africa in respect of an increase/decrease of all pre-tax investment and economic assumptions, an increase/
decrease in equity and property market values and increases in equity, property and swaption implied volatilities allow for the change in the
time value of financial options and guarantees that form part of the Investment Guarantee Reserves (IGR).
The sensitivities for an increase/decrease in all pre-tax investment and economic assumptions (with credited rates and discount rates changing
commensurately) are calculated in line with a parallel shift in risk-free reference spot rates rather than risk-free reference forward rates.
However, the 1% reduction is limited so that it does not lead to negative risk-free reference rates.
VNB sensitivities assume that the scenario arises immediately after point of sale of the contract. Therefore no allowance is made for the ability
to re-price any contracts in the sensitivity scenarios, apart from the mortality sensitivities for the South African business where allowance is
made for changes in the pricing basis for products with reviewable premiums.
At 31 December 2011, Nordic was included in all sensitivities.
247
FinancialsWhere we are goingWhat we doHow we have performedOur risksHow we govern our businessFinancials D1: Sensitivity tests continued
Sensitivity tests: MCEV
Central assumptions
MCEV, VIF & VNB given changes in:
Economic assumption 100 bps increase
Economic assumption 100 bps decrease
Equity/property market value 10% increase
Equity/property market value 10% decrease
10bps increase of liquidity spreads
50bps contraction on corporate bond spreads
25% increase in equity/property implied volatilities
25% increase in swaption implied volatilities
10% decrease in discontinuance rates
10% decrease in maintenance expense
5% decrease in mortality/morbidity rates
5% decrease in annuitant mortality assumption
Minimum capital requirement
NHR capital diversification
99.93% confidence level NHR capital
at 31 December 2012
£m
At 31 December 2011
MCEV
6,365
6,253
6,471
6,647
6,169
6,374
6,380
6,311
6,353
6,519
6,580
6,495
6,358
6,421
6,408
6,306
Value of
in-force
business
3,401
3,285
3,505
3,632
3,248
3,410
3,402
3,358
3,389
3,568
3,616
3,531
3,394
3,457
3,444
3,342
Value of
new business
197
180
215
206
192
198
197
197
197
237
216
214
197
202
201
192
MCEV
7,212
7,103
7,315
7,585
6,869
7,221
7,232
7,124
7,198
7,405
7,471
7,333
7,190
7,267
7,282
7,155
Value of
in-force
business
4,536
4,384
4,673
4,790
4,283
4,545
4,540
4,513
4,521
4,749
4,795
4,657
4,514
4,590
4,606
4,478
Value of
new business
233
215
250
244
223
234
233
232
233
280
255
247
233
238
239
227
248
Old Mutual plcAnnual Report and Accounts 2012MCEV NotEs to thE MCEV basis supplEMENtary iNforMatioNFor the year ended 31 December 2012 shareholder information
Listings and shares in issue
The Company’s shares are listed on the London, Malawi, Namibian and Zimbabwe Stock Exchanges and on the JSE Limited (JSE). The primary
listing is on the London Stock Exchange and the other listings are all secondary listings. The Company’s secondary listing on the Stockholm
Stock Exchange ended in September 2007, but the Company’s shares may still be traded on the Xternal list of the Nordic Exchange in
Stockholm. The ISIN number of the Company’s ordinary shares of 113⁄ 7p each is GB00B77J0862.
The high and low closing prices of the Company’s shares on the two main markets on which they were listed during 2012 and 2011 were as
follows:
London Stock Exchange
JSE
High
179.6p
R24.87
2012
Low
137.8p
R17.53
High
144.8p
R17.25
At 31 December 2012, the geographical analysis and shareholder profile of the Company’s share register were as follows:
Register
UK
South Africa
Zimbabwe
Namibia
Malawi
Total
Source: Computershare Investor Services
Size of holding
1-1,000
1,001-10,000
10,001-100,000
100,001-250,000
250,001+
Total
Source: Computershare Investor Services
total shares
% of whole
2,298,597,919
2,522,575,355
54,733,929
12,608,493
4,614,238
4,893,129,934
46.98
51.55
1.12
0.26
0.09
100
total shares
% of whole
20,315,005
22,149,577
29,230,791
27,205,559
4,794,229,002
4,893,129,934
0.41
0.45
0.60
0.56
97.98
100
2011
Low
98.1p
R12.34
number
of holders
10,579
29,189
30,107
532
4,586
74,993
number
of holders
64,791
8,623
1,018
171
390
74,993
Note
The registered shareholdings on the South African branch register included PLC Nominees (Pty) Limited, which held a total of 2,188,531,094 shares, including 314,329,195 shares
held for the Company’s sponsored nominee, Old Mutual (South Africa) Nominees (Pty) Limited, for the benefit of 410,309 underlying beneficial owners. The registered
shareholdings on the Zimbabwe branch register included Old Mutual Zimbabwe Nominees (Pvt) Limited, which held a total of 682,719 shares as nominee for 3,486 underlying
beneficial owners. The registered shareholdings on the Namibian section of the principal register included Old Mutual (Namibia) Nominees (Pty) Limited, which held a total of
5,994,010 shares as nominee for 6,891 underlying beneficial owners. The registered shareholdings on the Malawi branch register included Old Mutual (Blantyre) Nominees
Limited, which held a total of 55,179 shares as nominee for 136 underlying beneficial owners.
249
Registrars
The Company’s share register is administered by Computershare
Investor Services in conjunction with local representatives in various
jurisdictions. The following are their contact details:
UK
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
Tel: +44 (0)870 707 1212
Website: www.investorcentre.co.uk/contactus
South Africa
Computershare Investor Services Pty Ltd
70 Marshall Street, Johannesburg 2001
(PO Box 61051, Marshalltown) 2107
Tel: 0861 100 940 or +27 (0)11 870 8211
email: omsa@computershare.co.za
Malawi
National Bank of Malawi
Business Centre and Office Complex
Financial Management Services Department
No 7 Henderson Street
Cnr Hannover Avenue & Henderson Street
Blantyre
(PO Box 1438, Blantyre, Malawi)
email: nbminvestment@natbankmw.com
Tel: +265 182 0622/0054
Namibia
Transfer Secretaries (Pty) Limited
4 Robert Mugabe Avenue, Windhoek
(PO Box 2401, Windhoek)
Tel: +264 (0)61 227647
Fax: +264 (0)61 248531
email: ts@nsx.com.na
Zimbabwe
Corpserve Share Transfer Secretaries
2nd Floor, ZB Centre,
Cnr First Street/Kwame Nkrumah Avenue,
Harare
(PO Box 2208, Harare, Zimbabwe)
Tel: +263 (0)4 751559/61
Fax: +263 (0)4 752629
email: enquiries@corpserve.co.zw
Share-dealing services
Details of various share-dealing services in the UK, South Africa and
Namibia that are available through the Company’s share registrars,
Computershare Investor Services, can be found in the Shareholder
Information section of the Company’s website.
Strate
All transactions in the Company’s shares on the JSE are required to be
settled electronically through Strate, and share certificates are no
longer good for delivery in respect of such transactions. Shareholders
who have any enquiries about the effect of Strate on their holdings in
the Company should contact Computershare Investor Services in
Johannesburg on 0861 100 940 or +27 (0)11 870 8211.
Electronic communications and
electronic proxy appointment
The Company wrote to shareholders on its South African branch
register and on the principal and Namibian sections of its UK register
in November 2012 to inform them that it was moving to e-comms as
the default form of communication, in line with provisions in the UK
Companies Act 2006 and the Company’s Articles of Association.
Shareholders who wished to continue to receive physical copies of
shareholder communications, rather than accessing these from the
Company’s website, were required to notify the Company’s registrars
of their election to do so by 4 January 2013. For the time being, these
arrangements have not been extended to apply to shareholders on
the Malawi and Zimbabwe branch registers, but the Company plans
to keep the possibility of doing so under review.
If you are currently still receiving documents by post, but would like to
receive future communications from the Company by email, please
log on to our website, www.oldmutual.com, select ‘Investor Relations’,
then ‘Shareholder Centre’, then click on ‘Electronic Communications’
and follow the instructions for registration of your details. In order to
register, you will need your Shareholder Reference Number, which
can be found on the payment advice notice or tax voucher
accompanying your last dividend payment or notification. The
number is also printed on forms of proxy (but not voting instruction
forms) for the Annual General Meeting. Before you register, you will
be asked to agree to the Terms and Conditions for Electronic
Communications with Shareholders. It is important that you read these
Terms and Conditions carefully, as they set out the basis on which
electronic communications will be sent to you. Any election to receive
documents electronically will generally remain in force until you
contact the Company’s Registrars (via the online address set out
earlier in this section of the Report or otherwise) to terminate or
change such election.
Electronic proxy appointment is available for this year’s Annual
General Meeting. This enables proxy votes to be submitted
electronically, as an alternative to filling out and posting a form of
proxy. Further details are set out on the form of proxy.
Checking your holding online
An online service is situated at the Investor Centre option within the
website address www.computershare.com which gives shareholders
access to their account to confirm registered details, to give or amend
dividend mandate instructions, and to obtain a current shareholding
balance. There are also a number of downloadable forms from this
site such as change of address, dividend mandate and stock transfer
forms as well as an extensive list of frequently asked questions and the
facility to contact Computershare Investor Services by email.
250
Old Mutual plcAnnual Report and Accounts 2012`
Special Dividend paid in 2012
A Special Dividend of 18p per share (or its equivalent in other
applicable currencies), amounting to approximately £1 billion in
aggregate, was paid to shareholders on 7 June 2012. This Special
Dividend was paid by reference to the Company’s shares in
issue before the 7-for-8 share consolidation that took effect on
23 April 2012.
Financial calendar for the rest of 2013
The Company’s financial calendar for the rest of 2013 is as follows:
Annual General Meeting and First Quarter
Interim Management Statement
Interim results
Third Quarter Interim Management
Statement
Interim dividend payment date
Final results for 2013
9 May 2013
7 August 2013
6 November 2013
29 November 2013
End of February 2014
Final dividend for the year ended 31 December 2012
and timetable for its payment
The Board is recommending a final dividend (the ‘Final Dividend’)
for the year ended 31 December 2012 of 5.25p per share, which will
be paid on 31 May 2013, subject to being approved by shareholders
at the Company’s 2013 Annual General Meeting. Based on this
recommendation, the full-year ordinary dividend would be 7.0p,
up 23% in cash terms in sterling. Shareholders on the South African,
Zimbabwe and Malawi branch registers and the Namibian section
of the principal register will be paid their local currency cash
equivalents of the Final Dividend under dividend access trust or
similar arrangements established in each country. Shareholders who
hold their shares through Euroclear Sweden AB, the Swedish
nominee, will be paid the cash equivalent of the Final Dividend in
Swedish kronor. Local currency cash equivalents of the Final Dividend
for all five territories will be determined by the Company using
exchange rates prevailing at the close of business on 11 April 2013
and will be announced by the Company on 12 April 2013.
A scrip dividend alternative is not being made available in relation to
the Final Dividend.
The full timetable for the Final Dividend is set out below.
Currency conversion date
Exchange rates announced
Last day to trade cum dividend for
shareholders on the branch register
in Malawi
Ex-dividend date for shareholders on the
branch register in Malawi
Last day to trade cum dividend for
shareholders on the branch registers in
South Africa and Zimbabwe and on the
Namibian section of the principal register
Ex-dividend date for shareholders on the
branch registers in South Africa and
Zimbabwe and on the Namibian section of
the principal register
Trading suspended between registers
Last day to trade cum dividend for
shareholders on the UK register
Ex-dividend date for shareholders on the
UK register
Record date (all locations)
Trading between registers recommences
Annual General Meeting
Final Dividend Payment Date
closing rates on
Thursday, 11 April 2013
Friday, 12 April 2013
Wednesday, 17 April 2013
Thursday, 18 April 2013
Friday, 19 April 2013
Monday, 22 April 2013
opening of business on
Monday, 22 April 2013
Tuesday, 23 April 2013
Wednesday, 24 April 2013
close of business on
Friday, 26 April 2013
opening of business on
Monday, 29 April 2013
Thursday, 9 May 2013
Friday, 31 May 2013
Share certificates for shareholders on the South African register may
not be dematerialised or rematerialised between 22 and 26 April
2013, both dates inclusive, and transfers between the registers may
not take place during that period.
251
NoTes
252
Old Mutual plcAnnual Report and Accounts 2012 OLd MUTUAL
IS AN INTERNATIONAL LONG-TERM
SAVINGS, PROTECTION, BANkING
AND INVESTMENT GROUP
Introduction
Financials
1
2
Our strategy, vision and values
Chairman’s message to shareholders
What we do
4
6
8
10
12
Our business at a glance
Business model
key performance indicators
Responsible business
Our markets
Where we are going
18
22
24
26
Annual review
Group Executive Committee
Summary of our strategy past and future
Our strategy going forward – 2013-2015
How we have performed
30
44
54
58
63
65
Long-Term Savings
Banking
Short-Term Insurance
US Asset Management
Non-core business – Bermuda
Financial review
Our risks
74
Risk and capital management
How we govern our business
82
84
99
Board of Directors
Directors’ Report on Corporate
Governance and other matters
Remuneration Report
Group Financial statements
118
119
Statement of directors’ responsibilities
Independent auditor’s report
to the members of Old Mutual plc
Consolidated income statement
Consolidated statement of comprehensive income
Reconciliation of adjusted operating profit to profit after tax
Consolidated statement of financial position
Consolidated statement of cash flows
Consolidated statement of changes in equity
Notes to the consolidated financial statements
120
121
122
124
125
126
130
Financial statements of the Company
212
213
214
215
Company statement of financial position
Company statement of cash flows
Company statement of changes in equity
Notes to the Company financial statements
MCEV
222
224
244
225
226
227
228
Statement of directors’ responsibilities
Independent auditor’s report
Adjusted Group MCEV by line of business
Adjusted operating Group MCEV statement of earnings
Adjusted operating Group MCEV earnings per share
Group Market Consistent Embedded Value statement
of earnings
Notes to the MCEV basis supplementary information
Shareholder information
249
Shareholder information
Annual Report
www.oldmutual.com/reports2012
Corporate website
www.oldmutual.com
Reporting centre
www.oldmutual.com/reportingcentre
Forward-looking statements
This Report contains certain forward-looking statements with respect to
Old Mutual plc’s and its subsidiaries’ plans and expectations relating to
their financial condition, performance and results. By their nature,
forward-looking statements involve risk and uncertainty because they relate
to future events and circumstances that are beyond Old Mutual plc’s control,
including, among other things, UK domestic and general economic and
business conditions, market-related risks such as fluctuations in interest
rates and exchange rates, policies and actions of regulatory authorities,
the impact of competition, inflation, deflation, the timing and impact of
other uncertainties or of future acquisitions or combinations within relevant
industries, as well as the impact of tax and other legislation and regulations
in territories where Old Mutual plc or its subsidiaries operate.
As a result, Old Mutual plc’s or its subsidiaries’ actual future financial
condition, performance and results may differ materially from the
plans and expectations set forth in such forward-looking statements.
Old Mutual plc undertakes no obligation to update any forward-looking
statements contained in this Report or any other forward-looking
statements that it may make.
Acknowledgements
Designed and produced by MerchantCantos
www.merchantcantos.com
Printed by The Colourhouse
This report is printed on Amadeus 100 offset and Amadeus 75 Matt,
produced from 100% and 75% recycled de-inked post-consumer waste
respectively. They are ECF-assured meaning no chemical bleaching has
been used in their manufacture, and FSC®-assured so that the fibre is
sourced from renewable and responsibly managed forests with a traceable
chain of custody throughout the process.
This Report is printed by an FSC®, ISO 14001, and carbon neutral certified
printer using vegetable oil based inks. All processes in the production of
this Report are on one site.
Old Mutual plc
Registered in England and Wales No. 3591559 and
as an external company in each of South Africa
(No. 1999/004855/10), Malawi (No. 5282),
Namibia (No. F/3591559) and Zimbabwe (No. E1/99)
Registered Office:
5th Floor
Millennium Bridge House
2 Lambeth Hill
London EC4V 4GG
www.oldmutual.com
ANNUAL REPORT
AND ACCOUNTS 2012
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